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Precision Castparts (NYSE:PCP)

Q4 2012 Earnings Call

May 17, 2012 10:00 am ET

Executives

Mark Donegan - Chairman, Chief Executive Officer and President

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

Analysts

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Jason M. Gursky - Citigroup Inc, Research Division

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Carter Copeland - Barclays Capital, Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

David E. Strauss - UBS Investment Bank, Research Division

Kenneth Herbert - Wedbush Securities Inc., Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

J. B. Groh - D.A. Davidson & Co., Research Division

Timothy P. Hayes - Davenport & Company, LLC, Research Division

Eric Hugel - Stephens Inc., Research Division

Operator

Good morning, and welcome to Precision Castparts webcast and conference call to discuss its fourth quarter and year end earnings for fiscal 2012. This event is being recorded and will be available on PCC's company website at www.precast.com shortly after the conclusion of the presentation and discussion. Following the remarks by members of PCC 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

Thank you, operator. I'm sure you're all very familiar with our forward-looking statement at this time, and you need to take this into consideration when you're analyzing the following presentation.

I'd say in general, our fourth quarter, even though it delivered solid growth on both top and bottom line, from my vantage point, it really is just another step in capturing an opportunity that is sitting in front of us.

With that, looking at the company in total, for the year -- for the quarter, we saw sales growth of roughly 16.3% going from $1.67 billion last year to roughly $1.95 billion this year. We saw operating income increase 24% versus last year going from roughly $401 million last year to just under $490 million this year. We saw operating margins expand from 24% last year to 25.5% this year, and all this generated an EPS of $2.31 this year versus $1.87 last year. I want to note though that in the quarter, we did have a favorable tax benefit of just under $0.03.

If I look at the key drivers for the company, in sales year-on-year, we saw strong organic aerospace growth of 13%. Primary drivers in that were a 10% increase in the OEM and a 35% increase in aftermarket. The IGT saw strong year-on-year growth of 15%. And going back and looking at it year-over-year, the primary driver certainly was the aftermarket, but we did start to see some traction on the OEM side. As we've been talking about for the last 3 quarters, we did see a 15% decrease in General Industrial as we've been selectively diverting our assets to internal consumption, where we more than made up with a 30% increase in the intercompany activity. And as you can imagine, we also saw significant contribution year-on-year from acquisitions.

To close it off, we have higher material pass-through and selling price at the 3 primary mills of roughly $24 million. Sequentially, we continue to see aerospace growth of 7% versus Q3, and we also saw IGT demand take another significant step up versus Q3 of roughly 17%. And we continue to get traction on oil and gas where we saw an 11% improvement versus Q3. And interconnect pipe, even though it's coming off a lower base, did see some traction with 30% increase versus Q3, and General Industrial remained basically flat.

Operationally, year-on-year, primary drivers, we saw strong incremental drop through on our base businesses of greater than 50%. And then obviously, to that, we saw solid contribution from our acquisitions during the year. We did face some additional headwinds, as we always do, but compared to last year, we had absorbed a dilution from higher material, which negatively impacted material -- impacted margins by 0.4 percentage points.

And even though while we saw solid contribution from the acquisitions, they did have an impact on lowering margins and they impacted us by 0.5 percentage points. And versus last year, we also had $5 million associated with new product development and first article as we move into the new oil and gas markets.

If I look sequentially, then we did see continued solid leverage in incremental volume. And versus Q3, Q4 did see kind of a combination of some one-times. A large portion of the development costs that we just talked about occurred in Q4 versus Q3. We also had a fire in one of our furnaces in Cannon that caused a one month outage along with the maintenance cost to bring that back up. And in order to get ready for the growth we see coming, we also did start to receive our furnaces in airfoils, and to refresh your mind, we're bringing in 4 DS single crystal furnaces and one dip line. And then in our Oregon operations, with the long lead times of training our skilled operators, we had an 8% increase in the quarter in our Oregon workforce to handle future demand. I'll share the impact of these as we go through the segments.

Even though we did see these significant, our job is clear. We got to claw and scratch for every opportunity that's out there to overcome those, and that's basically what our job is. On that same challenge note, there is one item I do want to call up for the next year. If I look into next year, we do face additional pension expense of roughly $32 million versus fiscal year '12. Having said that, we all clearly understand that we got to find additional improvements across our operations to overcome this. We have them. They're in line, but it is a number that I wanted to make sure we kind of got out there. But not throwing over-the-fence, it's ours, we own it, we got it, and we will overcome this.

To put back into fiscal year '12, even though we ended the year with record sales and record earnings, we have a long runway on all fronts. Sales, operating income, margins, all have room for expansion. So certainly, it was just another step along the way.

Now look at our sales by market. Between organic and acquisitions, we saw aerospace expand from 57% last year to 64% this year. On power, even though we saw strong double-digit growth, as a percent of the total, they went from 22% last year to 21% this year. And General Industrial by design went from 21% last year to 15% this year.

Taking a closer look at aerospace and power, within aerospace, a significant driver certainly as it always has been; continues to be large commercial at 73% of the total, followed by military at 18% and regional and business at 9%. Looking at power, the largest component is the IGT at 54%, followed by the oil and gas at 33% and interconnect pipe at 13%.

So moving from the total into the individual segments, beginning with Investment Cast Products, sales increased 7.8% versus last year going from just under $559 million to $603 million this year. Operating income increased by 11% versus last year going from roughly $177 million last year to roughly $196 million this year. And margins expanded from 31.7% last year to 32.6% this year.

If I look at the key drivers on sales versus last year, we saw good aerospace growth of 9% driven by our strong position on the growing platforms. Again, it's a product that we've worked hard to get positions and contracts on the right platforms. And we did see another solid contributor from the 787 as it continues to ramp up to its current rates.

To date, in structures, we're sitting at roughly 3.5 rate per month. In airfoils, we're in that 4 to 5 per month range. And into that, we also saw very strong aftermarket increases of roughly 50% versus last year.

On IGT, we continue to see strong growth of 16% versus last year. All in, year-over-year, certainly the significant contributor was being the aftermarket. And versus last year, bringing it all around, we saw higher material pass-through, small number of roughly $2 million versus last year.

Sequentially, we continued to see growth in the aerospace of 3% versus Q3. And we saw continued strong sequential IGT growth of 10%. And versus Q3, we did see some movement in both the OEM and the spares.

Operationally, on year-on-year, we continued to see solid incremental drop-through of 45%. Primary drivers in this, we continue to find ways to hold our revert levels up. So if I go back to the last upturn, certainly as the volume went up, the revert level started falling off. I think the acquisition of Caledonia and continue to expand the tentacles bringing on Primus continue to let us find ways to keep those revert levels high. We continue to see improvement in scrap and rework kind of across all of our facilities, and we're at no loss in being able to provide additional ways to impact that variable cost again across all of our assets.

If I look sequentially, we certainly see the benefit of the additional volume. And to put the value of what we talked about on the front page in Investment Cast, between the fire and the new equipment we brought in, in airfoils and the increase in employment, that was -- that put a headwind of roughly $4 million in Investment Cast. Now we always have some sort of headwinds. But usually it would be one of these, maybe 2. Getting 3 of these lined up in a quarter certainly provided a number of opportunities at the operation that it come up with, but again, that's what we get paid to do, and that's what the operations typically overcome.

If I look forward in Investment Cast, I think we see solid upside in all fronts. There's a number of announced ramps that we have to be positioned to support. In narrow-body, we have the next 320 come in the second half of this year, we follow that with the 737, another step up in calendar year '13. The wide-bodies take another step up in calendar year '13, and the 787 moves from their current build rate of 3.5 to 5 by the year end. And then as we go through calendar year '13, it continues to take additional step up. So from the aerospace side, there's a number of drivers that we have to be prepared to support.

On IGT, we continue to see upside as we move through fiscal year '13. Compared to last year, at this point, we're looking at double-digit growth in IGT this year versus last year. In the pension portion in Investment Cast, it's roughly $13 million versus last year.

Moving on to Forged Products, we saw a solid sales growth of 11.3% versus last year going from roughly $771 million last year to roughly $858 million this year. We saw operating income increase 31% going from roughly $147 million last year to $193 million this year. We saw operating margins increase from 19.1% last year to 22.5% this year.

If I look at the key drivers, on sales, year-on-year, and again first, to put an apples-to-apples comparison, we have higher material pass-through and selling price in our 3 primary mills of roughly $21 million versus last year. From there, we saw strong aerospace growth of 28% versus last year. Two primary drivers from that: we had robust organic growth of 14% driven by the base rates and the 787 ramp up. And in Forged Products, we are currently at roughly 4 per month. And we also saw in this segment additional benefit in aerospace from the acquisition of Tru-Form.

As with Investment Cast Products, IGT saw a strong growth of roughly 15% versus last year. And our drive in oil and gas, again, even though it's up at lower rate, but we're continuing to accelerate our way through, saw 40% increase versus last year. And we continue to utilize our resources as we've talked to support our internal needs. We saw roughly a $60 million increase versus last year. We also saw the benefits from Rollmet and KLAD in the year.

Sequentially, we had continued improvement in our aerospace growing by roughly 10% versus Q3. And we saw solid growth in the oil and gas and interconnect pipe with sales growing versus Q3 by 16%. And we had a 3% decline in General Industrial, but an additional pickup of 8% in intercompany support.

Operationally, versus last year, we continue to see strong drop through on our organic growth of greater than 50%. And certainly, our acquisitions had a solid effect in contributing to our margins. And I think we do see in this area the utilization of our own assets for internal consumption also are a significant driver towards that cost model improving our margins.

With all this, we're able to absorb the development and qualification costs in new oil and gas again that were roughly $5 million. Sequentially, we saw solid leverage on our incremental sales versus Q3. And of that $5 million in Q4, we had $3 million incremental development and qualification cost versus -- for the oil and gas versus Q3.

If I look forward, in aerospace, we have the same positive drivers that we covered in Investment Cast. The rate increases of both the narrow and the wide-body and certainly, the continued ramp increases on the 787. In power, we have a number of drivers out there. We begin to deliver the Saudi Aramco order and that goes through Q3 -- fiscal year Q3. And that is followed by the ADNOC order, which goes through the fiscal Q4.

And we continue to book orders to penetrate in this market. And right now, we're looking year-over-year at a 3 to 4x increase fiscal year '13 versus fiscal year '12. And again, we would expect to continue to see the benefit of utilizing our assets for internal consumption.

The pension headwinds in Forged are roughly $10 million. And through that, we had also received the benefit of RathGibson. Kind of a quick scenario on Rath, it's been the desire of ours to continue to penetrate this tubular market. The base businesses have good capabilities in meeting the large seamless pipe ramp, expands our capabilities in the welded, thin-wall and also has the ability to do small diameter seamless. They have a wide range of capabilities in terms of length, wall thicknesses and diameter. And they serve our primary non-aerospace markets, oil and gas, chemical, petrochemical and power generation. We only owned them for what, 10 weeks?

Shawn R. Hagel

1

Yes.

Mark Donegan

At best?

Shawn R. Hagel

Well, we bought them 2 days into the quarter.

Mark Donegan

Right. So we've owned them for a short period of time. In that short period of time, we've already identified a number of synergies in front of us. Certainly on sales, I think we have the ability to utilize our global footprint and pull their product through. We have numerous opportunities to attack costs as we normally do on our acquisitions.

We have vertical integration of material supply and the revert utilization we can pull back into our streams. We can consolidate material volume across other alloys, and we can look at the outside processing needs they have and being able to optimize those. And obviously, driving our toolbox the way we run our factories has already been put in place. Steve's there with the team, and he is making good progress in a short period of time.

With all this, we are looking to drive synergies in the first 12 months of roughly $15 million to $20 million. And we're looking by year 5 to get at least $15 million. So from this, in a short period of time, we're getting good traction, I think it will be a solid acquisition for us.

Finally, moving on to Fasteners. On sales, we saw a 41.5% increase versus last year, with sales going from roughly $345 million last year to roughly $488 million this year. We saw operating income increase from roughly 33% last year going from $105 million last year to $139.5 million this year. And we saw operating margins expand -- or excuse me, operating margins go down from 30.5% last year to 28.6% this year.

If I look at the key drivers, on sales, we've continued to see a steady recovery. And I'm going to amplify again, steady recovery in our base aerospace Fasteners business with organic growth of roughly 15% versus last year. And even though we are seeing their growth, we are still behind the current build rates. In Fasteners though, we did begin to see a recovery of our core Fastener Products of 10% versus last year, and we're still lagging both the build rate and our other operations on the 787 when we feel we're somewhere in that 2 per month range on average. Some facilities will be a little more, some facilities will be a little less, but it's averaging out to about 2 per month.

And certainly year-on-year, Primus was a significant contributor to the segment's growth, and Primus is now sitting at a build rate of roughly 3 per month on the 787. So I think Primus has some certainly upside as the build rate moves towards 5. And General Industrial basically remained flat.

Sequentially, we continued up the slope on aerospace sales growing by roughly 10% versus Q3 in Fasteners. And Primus saw good sequential growth of roughly 5% versus Q3. And again, General Industrial remained basically flat.

Operationally, versus last year, we saw good incremental drop-through on our organic growth of greater than 35%, and Primus was also a significant contributor versus last year. But in that, Primus, even though a significant contributor towards the operating income dollars, was a dilution compared to last year on margin pressure. But again, it's still a solid contributor for us.

Sequentially, we certainly saw the benefit from the organic growth in the aerospace Fasteners. But along with the organic growth in Primus, and as we do with a lot of our acquisitions, we get the growth and we get the improvements. So we kind of get a double dip. We saw strong incremental drop-through of roughly 50%. So again, Primus is seeing good movement on the operational side, and we also had the benefit of a full quarter of EBIT from PB.

Looking forward, we continue to see our backlog strengthen in aerospace Fasteners to support the continued increase. And again, it is a slope, but we are seeing the backlogs continue to strengthen. And I think Aerostructures certainly will be able to kind of deliver that catalyst on the solid operating improvements as well as supporting the additional build rates.

And Fasteners is another area that we want to be a platform for acquisitions in the Aerostructures side. And we just announced the latest with Centra, being our most recent announcement, and again, we expect that to be a contributor as we move forward.

So with that, moving off to segments and on to cash, we saw a positive change in earning cash balance of -- from Q3 of roughly $361.4 million. The debt remained, I say, basically flat. Shawn may say we came down $200,000, but basically flat. And we utilized $15.2 million in the quarter for small acquisitions. And all this generating of cash in the quarter before acquisitions of roughly $376 million.

So with that, I'm going to turn it over to Shawn to go over the inventory position.

Shawn R. Hagel

Thanks, Mark. As we ended the fourth quarter, we saw our inventory balance hit $1.818 billion, which was down slightly from the $1.821 billion we had at the end of the third quarter. We continued to focus on inventory reductions throughout the company despite the fact that we saw sales growth of over 8% quarter-to-quarter, and we continue to build inventories in certain areas. One of them is Saudi Aramco and ADNOC orders that were discussed previously now have almost $53 million of inventory in our pipeline that we're working through; 16 of that was built during the quarter.

We had other new business builds that we also had during the quarter of about $15 million, which added to the inventory balance. That was offset by inventory reduction initiatives throughout the company as we continue to drive down our inventory balances, even as we grow our internal-sourced inventory more and more, it grew by $8 million in the quarter from Q3 to Q4. And we now estimate that the amount of inventory we have internally due to those initiatives of sourcing on our own have added incremental inventory of over $100 million.

So overall, this continues to be a major area of focus for the company as we continue to try to drive inventories out, and we'll continue to do that through fiscal '13. That's kind of the balances that we have in inventory.

Now it’s back to you, Mark.

Mark Donegan

You can talk more if you want.

Shawn R. Hagel

No, thank you.

Mark Donegan

Sure?

Shawn R. Hagel

Yes.

Mark Donegan

Okay. So in summary, for Q4, and in Investment Cast, saw strong aerospace growth on both the OEM and the aftermarket. IGT also saw strong year-on-year growth in the spares demand and -- but the OEM did kind of come in, in Q4.

Forged Products realized the same strong aerospace growth as Investment Cast, and saw strong growth versus last year in the oil and gas. And IGT also saw strong growth in the quarter. And we did see -- so we ended the year seeing some strengthening in the interconnect pipe. And certainly, we will -- we have and we'll continue to see additional benefits of utilizing our assets for internal use.

In Fasteners, we continue to see steady improving demand from aerospace, demand on both the OEM and the distribution side. And Primus is continuing to become a solid contributor on both the top and bottom line.

If I look forward, in aerospace, in Cast and Forged, certainly, we are well positioned, contracts in place to benefit from all the announced rate increases and the base rates. And as the 787 accelerates, certainly will be a major benefit across all of our assets.

We continue to see solid aftermarket growth demand through fiscal year '13. And in this world, in Q2, we've kind of talked about this. We've told you we'd give you the number this quarter. Along with our normal maintenance that occurs in our Forged Products, we've talked about the major outage of the 50,000 ton press. We are looking for that press to be down most of the quarter. And between the cost of loss absorption and the cost of the additional maintenance, we're looking at a range of between $5 million and $7 million associated with that press outage of incremental expense.

In Fasteners, again, I believe we'll continue to see steady recovery in the base platforms, and we're still closing the gap. And on the 787, I would say was still lagging. We have seen some life in terms of some of that demand. But I tell you, we don't have an exact timing yet on when we think we'll catch the build rates. But the fact that we are starting to see some demand on some of that 787 product for us is kind of a positive sign.

In Aerostructures, certainly we'll benefit from the rates. And through that, we'll capitalize and continue operational improvements, and we would expect to see additional benefit when we close Centra on integrating that. And I would expect to see in this space additional acquisitions as we move through the year.

In power and Investment Cast and Forged, and I think IGT schedules continue to remain solid with future growth on both the OEM and spares. In oil and gas, I think it should provide to be a good catalyst as we kind of talked in the presentation for us. We got delivery of the first 2 major programs as we wind through the next 4 quarters. And we also have the integration of RathGibson and their market potential and the cost take out and the number of area opportunities that are there. And this is also an area I would expect to see being an opportunity for additional acquisitions in this -- the power business. And we'll continue to be selective on what we get in General Industrial and make sure that we're getting the best value for our assets kind of on that General Industrial and internal use.

So with that, we'll open it up for questions. And I'm done talking.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Mark, at the end of the release, you talked about headwinds and the capability to offset them. Could you elaborate a little bit on that?

Mark Donegan

Well, again, $32 million is not a small number. But with what we have and where we are in the growth, my -- certainly, we will power our away to overcome those and go beyond that. The reason why -- $32 million is a big number that needed to be called out. But like I said, I'm not throwing it over the fence to anybody. We get it, and we're not sitting with a lack of ideas on what to do. So we'll overcome it, and we'll go beyond that in terms of what we need to do. So it's really, Howard, more just to call it out as to what was there, kind of the...

Howard A. Rubel - Jefferies & Company, Inc., Research Division

And so it's not an operational issue like you're also pointing out the Forged outage for that period; it's just the accumulative all these little items. It's nothing big or anything like that.

Mark Donegan

No, no, no. Right. The one-off that we have -- we got the pension. It is what it is. We've got to overcome it. The one that's there that we've been prepping for is the outage. Shy of that, it's just the normal wear and tear that we face as an operation, and we fight our way through. But no, there's nothing other than that, that we know about today.

Operator

Moving on to Jason Gursky with Citi.

Jason M. Gursky - Citigroup Inc, Research Division

Can you just give us an update on the CapEx outlook for this year and the next couple of years, if you wouldn't mind talking with us about having...

Mark Donegan

Yes, I think that this year, we'll be up to some degree. What we've basically done is kind of set a target of what this capital expenditure was plus the growth rate, and that's kind of the range we're coming in at. I think that we have a couple of stops. This year, we've talked about the furnaces that we're bringing in, in the airfoil side. We have additional ones coming in after that. And then we have the Grafton outage, which is putting a number in there. But I think that we're looking at is kind of a proportional growth in capital to overgrowing that. If I'll look out beyond that, I'd say the next inflection point for us really is in the powder side of our business. And depending on at what rate some of the more advanced engines come in, so the leap would be one. But how that transitions between the existing platforms and new ones will dictate when we will need to put another atomizer in which is how we make the powder and another iso-press. That's conversations we're in right now, but it's probably going to be somewhere in the '15, '16 timeframe is when we'll face that decision point. And that's probably $100 million price tag when that occurs between those 2 pieces of equipment.

Operator

Moving on to Steve Levenson with Stifel Nicolaus.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Are you finding any increased demand from European manufacturers who want to do more U.S. dollar-denominated purchases?

Mark Donegan

Yes, we are.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Or are you making an effort there?

Mark Donegan

Yes. I mean there certainly is a -- has been a conscious effort. And I'd say it's probably been going on for a good year. But as the opportunities are coming up in European manufacturers, I'd say we are certainly getting a lot more looks and a lot more opportunities and our win rate is going up as those contracts are coming up. And I'd say it is a desire to get more procurement in U.S.-based denomination.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Want to take a guess at impact over the next couple years?

Mark Donegan

I mean, I'd say that our success rate will be -- so if I say the baseline is 0, it's going to be in the double-digit success rate. So I mean, it's -- on our European, it will be a bigger number than we still could have gotten. Like I said, I put it in that double-digit type of number success rate over what we've historically gotten. So it's not small.

Operator

Moving on to Robert Spingarn with Credit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

On the oil and gas pipe and the interconnect, I think your slides show you're about $700 million now. How do you see the 2 growing? Can you contrast the growth rates? Can you get the interconnect back to anywhere near where it used to be? How should we think about this business longer term? Can it double with the relative growth rates?

Mark Donegan

I think what we're trying to get everybody to understand is now with the oil and gas, I really -- I'm not as driven as, say, interconnect. What we're looking at is utilization of the asset, making round product between 24 and 36 inches with wall thicknesses of 1 to 3 inches. So what we're trying to say is what is the best utilization of that? I'd say right now, you're going to see more growth in oil and gas because the market is demanding more of that product than we get a better return for our assets in that particular product line. That probably at some point in time will shift. Interconnect, when the Chinese and the supercritical coal plants start going, you may see it skewed down a little bit. But what I'd like to focus on is the amount of round product coming off that press, whether it's oil and gas or interconnect. It is just how are we deploying making round product. So I think we'll see a disproportionate amount of growth in the oil and gas. And that's probably what I'd see -- again, when you get an ADNOC order or a Saudi Aramco order, those by themselves can use the press for a period of time. So I think just with the product-driven line, you're going to see a lot more growth in oil and gas.

Robert Spingarn - Crédit Suisse AG, Research Division

And Mark, long term, do you see this bigger than IGT combined, much bigger than IGT, or do they grow in parity? And would you do any M&A in connectors?

Mark Donegan

I think it will be bigger than IGT over time without a doubt because it has the ability to -- we have another press we can use. We have a -- so we have a lot more assets we can deploy to this over the next 4 or 5 years as the market demanded to go. So I would expect to see this grow. And again, all that you need is that supercritical to come into play and you get another accelerator. So I would expect that this is going to just become a bigger piece. And probably over time, it’d be 50-50 IGT. This round pipe is probably where it would go to over time.

Robert Spingarn - Crédit Suisse AG, Research Division

Do you get any connectors?

Mark Donegan

Sorry?

Robert Spingarn - Crédit Suisse AG, Research Division

Connectors. Would you do elbows, connector unit like.

Mark Donegan

What we basically do with that, Rob, is we provide the material. We don't bend. We can provide couplings. We can provide shapes. We don't bend, but we do typically provide the material that a person will bend. So do I see us today going out and buying a piece of equipment? No. Could I see us somewhere down the road buying a business that has that? Possibly.

Operator

Our next question will come from Carter Copeland with Barclays.

Carter Copeland - Barclays Capital, Research Division

Just a question on cash and cash conversion. We can't see all of the accounts and how it ended the year, but it looked like it stepped down a little bit from the kind of 90% free cash flow conversion levels you've seen in the last couple of years. I wonder if you might speak to that and talk about how it may impact 2013 and what you're thinking about cash generation there.

Mark Donegan

Yes. I think from the cash standpoint, if I look at the 2, I’d call them 2 opportunities that basically, there has been a -- over the last couple years, there's been some skewing of the customers requiring shipments towards the end of the quarter. So that kind of builds our receivables to date. I think as we move into the demand cycle coming in there, we need to work with our customers to pull that into a more equal. So I think that as we move into '13, I would expect to see more of the -- that receivables equally spread. On the other plus side, the opportunity is certainly we have a large amount of inventory tied up in the press outage that we got to kick out. And we have a large amount of inventory that we have sitting in Saudi Aramco and ADNOC that we got to kick out. So I think that those are 2 opportunities that are fair -- they're in the -- if you have those, so all 3 was up. They're well over $100 million. So I think that there's a fair amount of cash kick out there. On the flipside, the other thing that's changed over the course of the last year as we've gotten from $10 million, $20 million, $30 million, $40 million, now up $60 million incremental in internal supply, where we're buying the outside, we had AP, we now don't have that AP. So I'd say that I think we're probably looking at, I think, at $100 million over in terms of performance that we need to get out of the system on top of kind of what we did last year. Did that answer your question?

Carter Copeland - Barclays Capital, Research Division

Yes, yes. I'm just trying to get a sense. So it sounds like 2013, there's some push and pull in both directions and some things to get done. But '14 might be more...

Mark Donegan

Yes, I think '13 has got more opportunity to get that conversion back where it needs to be. I think there's more pluses than there are negatives at this point in time.

Operator

Moving on to Joe Nadol with JPMorgan.

Joseph Nadol - JP Morgan Chase & Co, Research Division

I want to follow up on the cash question, actually. And you guys have been giving a lot more information on inventory the last number of quarters, well I guess the last couple of years. But when you take a step back and take a broad look at your financial statements the last few years, that really has been, I think, where the conversion has suffered. It's not really the receivables. It's really the inventories. And you've given a lot more detail and a lot of detail specifically on some of the things you're looking at right now in terms of Aramco and the outage that you're expecting, et cetera. But I guess conceptually, is -- what can you say about the inventory line over the next 2 to 3 years relative to your sales growth? Do you expect inventory as a percentage of sales to continue to go up, or do you think that there's -- that we've kind of peaked here?

Mark Donegan

Well, I think that if I look -- let me answer it 2 ways. I think if I look at this coming year, I think we're going to try to put pressure and say, the inventories are in place, so let's handle the growth without adding the inventory. We got a lot of stuff that's in play. We've got the build over in the last year, the Grafton shutdown. We got the internal supply we've kind of put in place. And then we got the ADNOC and Saudi Aramco. So what I would say over the course of this year is I'd like to hold the inventories as close as we can and drive the growth and then kind of get that cash conversion from there. If you go a year from now and let's say that has been successful, then certainly, I think the additional growth, there'll have to be some inventory put in play. But I don't think it's going to necessarily be a ratio that's 1 for 1. I think that there's still going to be opportunity carried in the following year, but I think this is the year we got to try to just put the lid on, in total, the inventory grow it, bring the ratios down, and then probably go into fiscal '14 and '15, adding some degree but not at an accelerated rate.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Is there something about your business that's different than it was 4 years ago? Is it the increased revert capability that you've been building over time maybe and so you get some benefit on the margins, but you'll lose some on the cash flow? Or is this just cycles or -- because if I look at '08 versus '12, your sales are up 5%, and your inventory has doubled.

Mark Donegan

Well, we're not even the same company we were in '08. I mean, we got to start there. We got the whole inventory chain. Our internal supply is in the hundreds of millions of dollars difference. The revert all the way through the stream now. We used to sell it to the outside. We net all that revert and every facility from the day it's cut off, is now kept inside for gas parts. That used to go out -- we used to cut it off and sell it within a day.

Shawn R. Hagel

That [indiscernible] longer lead times.

Mark Donegan

The oil and gas, I mean, those products are taking 9 months to get out. They go from melting the metal; they go through SMC. They go on to Houston; they go over to Rollmet; they go outside for testing. I mean the product lines are shifted drastically. So I think to go back to '08 and say -- I mean, I think if you go back and look at the performance of the company in terms of EBIT dollars generated and income and EPS, the company is getting the benefit. But it's a much different-looking company now. Do I have sitting in front of me every single number that, that adds up to '08 right now? No, I don't. But directionally, it's a different company. Now is there more in the stream today? Yes, there is. I think that the standpoint of what we've been trying to say is, there again, I'd keep saying there's probably $100 million to $150 million sitting there that needs to come out, and we got to grow without doing that. But to go back and say '08 to here, the company is not even remotely the same.

Operator

Next, we'll hear from Sam Pearlstein with Wells Fargo.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Can you talk a little bit more about the 787? And so I guess first part is just with Centra, what is your total content now on a 787? And then if I just look at the detail you gave in the individual segments with structural, airfoils, Wyman fronts, it seems like you're not very far off of the current 3.5 production rate of Boeing other than the core Fasteners which is 1, 1.5 ship sets per month. It doesn't seem like there's a very big gap. Am I missing something?

Mark Donegan

No. I mean, again, if you look at the numbers, we’ve got to get airfoils at 5, structures at 3.5, so we got to get structures up 1.5. Forgings is sitting at that 4 number, so they got to go up 1 to get to the 5. And then Fasteners, you got to go back to when we said we had roughly $5 million, Fasteners is in that $2.5 million to $3 million range per plane. So them being at 2 is not a small number. So they got to go 2 to the current 3 to 5. Somewhere along the way, we're going to get the inflection point on $2.5 million per plane per month. So I mean that's a big, big number. I don't think it's one that's worth discounting. To answer the other question on the Centra, and we don't own Centra yet. But if you look at the value, Centra adds about another $0.5 million to that 787. So on a GE-powered 787, that puts us at about $7.5 million per plane.

Operator

Moving on to Peter Arment with Sterne Agee.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

A question I guess on the aftermarket sales. I guess I'm thinking of Investment Cast. But I guess across the board, very strong -- and I guess includes IGT, too. How do you see that playing out as we go through fiscal '13? And what kind of visibility do you have on that? I guess you see the utilization rates that we're seeing off the charts in the IGT world with these, with the plants when given the low natural gas prices and all that. What kind of visibility do you have there?

Mark Donegan

Yes, IGT, if you kind of go back to the last conference call, we're kind of saying, "Hey, listen, we're seeing a pull in." And I'd say that, that pull in has continued. So I think from the IGT standpoint, we're seeing today that demand hold very strong, continue to go up throughout this year. Again, that's kind of the main driver that year-over-year, I think we certainly see mid double-digit growth in terms of IGT. On the aerospace side, our customers right now want more. So if I look at the equipment that we've talked about bringing in airfoils, I need that equipment right now. So I am behind what the customer wants. In terms of -- and goes for structural castings, too. So if I look at the people we brought in play, we will certainly see those schedules going up from where we had expected them to be or whether the capital or whether the people. So on the airfoil aftermarket side, I need -- the demand is here and it stays here. I just need the equipment to come in to be able to get more volume out. And that's why we're kind of putting in extra money into getting that.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Yes. Is this different from what you've previously seen in the cycles, the way it's filled in, or is it...

Mark Donegan

Well, it typically comes -- I mean, unfortunately, it comes like this. I wish we had better foresight to it. If I go back to a year ago, we thought we were good, and we were going to have to place the DS single crystal furnaces somewhere in this year for delivery coming basically 6, 8 months from now. Before the demand came in, we got cut short. So we had to -- we got to kick the capital project off 6 to 8 months before we expected it to come in. So I wish I could tell you it didn't go this way, but typically, on the IGT side and the aerospace side, it comes in quick. And typically, we'll get schedules that roll in the overdue, and we then fight to get the overdue out. And that's kind of what it looks like right now on both the IGT side. Now we work with our customers. We're not shutting lines down, but do our customers want more today on both the IGT and the aerospace side? Yes, they want more.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Yes. And just related to that, if you're -- how are you seeing on, I guess, your -- in the material side, your ability to -- with lead times are putting that, locking in that capacity that you need to support all these rate increases?

Mark Donegan

I think we're good on the -- obviously, the castings side, we make our own, so we're fine in that. The Forging side, between our own internal capability and the outside, we're good. The area that we are concerned about is on the Fasteners side. And I -- why I say that is the lead times on Fasteners, raw material are stretching. They've probably gone from 12 to 16 weeks to 25 to 30 weeks. And when the demand comes in, it typically comes in right away. So I -- across the raw material supply, that is where my biggest concern is coming in, looking forward.

Operator

Next is David Strauss with UBS.

David E. Strauss - UBS Investment Bank, Research Division

Just following up on that a little bit. It looks like last year, this year, you did about 10% organic growth. It sounds like power is definitely going to be better this year than last year. Overall, Mark, do you see the organic growth rate accelerating -- revenue organic rate accelerating next year?

Mark Donegan

Yes. I think it has the opportunity to be higher. I don't think it's going to be a multiple, but I think it's there or better coming into this year.

David E. Strauss - UBS Investment Bank, Research Division

Okay. So power, better; aerospace, similar. It looks like aerospace is up about 15% organically.

Mark Donegan

Yes. Again, I think what moves that needle one way or the other is what happens with the Fasteners. The Fasteners -- if the Fasteners keeps going on the slope it is, it's probably going to look more comparable. If the Fasteners 787 work comes in and Q4, Q3 type of number, I think it moves the back half up. So I think Fasteners is the one that can move that further beyond this year. The rest, I think we got a pretty clean line of sight right now. But Fasteners has the ability to be a needle mover in that.

David E. Strauss - UBS Investment Bank, Research Division

Okay. Quick follow-up maybe for Shawn. Shawn, can you talk about what drove the incremental increase in pension expense and maybe contributions for the year and where you sit from a funding standpoint?

Shawn R. Hagel

Yes. What really drove the increase, or what's really driving this fiscal '13 increase is a change in the discount rates. That's probably 2/3 to 3/4 of that increase, and it's just -- we are in a situation right now where interest rates are at an all-time low, and so the discount rate dropped which increase the liabilities and the pensions fairly significantly, much more so in the U.S. than in Europe. The other component of that is we didn't -- for fiscal '12, we did not hit our targeted asset return. So we're amortizing the loss of those returns as well. And that's the other piece of the $32 million increase. From a funding perspective, we did put $50 million in right at the beginning of this year to help mitigate some of that exposure to the expense. And we're looking at plans that are somewhere -- if you look at our defined benefit plans, we're looking at almost a fully-funded situation, about 99% funded. So we're not in a -- we're not concerned with regard to where our asset base sits. It's just really a function of what happened economically, not only to us, but to basically all companies this year as the discount rates continue to drop.

Operator

Moving on to Ken Herbert with Wedbush.

Kenneth Herbert - Wedbush Securities Inc., Research Division

Mark, just wanted to follow-up. You highlighted some of the labor increases in Oregon alone and some other areas. As you look out to 2013 to support the growth, where do you stand in terms of the workforce and over time? And are you anticipating similar increases like you've seen, obviously, in the second half of '12?

Mark Donegan

No. The biggest -- if I look at our cost model across the company, by far, the most disproportionate amount of labor is in large -- is in Oregon's structural operations. 60% of their variable cost is labor. So we always -- unlike airfoils and forgings, where we're -- we more -- do more with equipment, large structural castings tends to fall into the labor. So I'd say that from a labor standpoint, we always see the larger portion of growth will come in the Oregon operations. If I look across the rest of the company, over time, actually is in pretty decent shape. We're probably running on average I'd say 13% to 14%. So from that standpoint, we certainly have some headroom, which we like to use that to let the productivity try to run, so let the overtime kind of buffer that a little bit. But the only real place I think we have to continue to stay aware of it is in the Oregon operations. But I feel as though we're pretty well-manned across the rest of the company.

Kenneth Herbert - Wedbush Securities Inc., Research Division

Okay, Great. So just a quick follow-up, so as you continue to see the volume increase, the variable cost structure then within the operating segment should get better, obviously, as you go through '13?

Mark Donegan

Yes. And again, from the standpoint where that headwind comes in, when we bring on 8%, and if I go back another 2 months, we actually went up almost 12% in Oregon operations. A lot of these jobs -- I mean, if you look at a certified Level III VIK VAN [ph] FBI inspector x-ray, you're looking at a year to bring them up to speed. If I go to a welder, then you're looking at 6 months. If I look at a grinder, you're looking at 3 months. So what it really shows is it just stalls productivity horribly. Now when we stop that hiring, you expect to see that productivity move. So I, from that vantage point, think we have in kind of a average, the quarter we just finished should have been kind of the low point, and now we should be able to accelerate from this point forward in terms of that variable cost model.

Operator

We'll move on to Cai Von Rumohr with Cowen and Company.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

So if we look at your full year breakdown in energy and exclude IGT and exclude the seamless pipe, it's about $500 million, of which under 100 is the oil and gas. So what's that other $400 million and what are the -- what's the prospect for that business in fiscal '13 and for the Industrial business that you didn't really talk that much about?

Mark Donegan

Well, the rest of the oil and gas, there's a large array of products that come out of special metals, too, that go into that power side. So there is an enormous amount of tube at all different shapes. SMC basically handles from 24 inches down to about 6 inches, and then there's all sorts of other shapes come out of SMC. So I'd say the other big piece of the puzzle on that is the SMC side of the business, which falls into that category. What was your other point, your other question?

Cai Von Rumohr - Cowen and Company, LLC, Research Division

The other one is in industrial. Industrial, sort of what are you looking for going into '13 in industrial?

Mark Donegan

I think General Industrial, honestly, we'd probably look to stay flat. I think what we've done is we've tried to selectively choose what products we're going after. We try to get the right pricing from that standpoint. And again, we have to use our assets. So if I look at melting a pound of heating coil, I hate using that example, but that is a particular piece, and a pound of either ADNOC or Saudi Aramco or internal utilization, we get a much bigger bang for the buck. But again, I think we're looking at flat to up single-digit growth is what I'd kind of say from the General Industrial looking into next year.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Got it. You made one sort of cautionary comment talking about with growth, we have to face occasional headwind. And you did mention the one of the press shutdown in the second quarter. Are there any others that are visible that you could kind of help us understand as we go into the year?

Mark Donegan

Again, Cai, it may have come through the wrong way. The headwinds were more operational. So we -- from a growth standpoint, I don't see an impedance other than I got to get the equipment in place. I mean, the market wants me to grow more than I'm growing right now. I've get over dues. So I got to figure how to get those out. So I don't see any hindrance towards growth. The things that we said we overcome, we always face the operational headwinds, which are either hiring or we don't like to say fire, but we always have some sort of press outage or unplanned events that go on. So from that vantage point, that's the way of life in running a manufacturing company. The only thing I see out of the ordinary that we're going to have to -- that we called out is the 50,000-ton press. So at this point in time, again, it's not sales headwinds, it is operational. And the only out of the ordinary one is that 50,000-ton press. Other than Q2, we always bring down our forging complexes to do the normal overall repair. But that's always in our Q2.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Got it. Quick one. Was there a big tailwind from the price of natural gas coming down?

Mark Donegan

Not yet. We are -- we hedge out a long time, so we are by no means paying today the rate. Now having said that, as you move through this year and into next year, yes, you start picking up some positive benefit from the natural gas. But right now, we're not -- we're living off of hedges that we placed in probably as far back as 1.5 years to 1 year ago, and we're hedged out almost 2 years now in natural gas.

Operator

Moving on to J. B. Groh with D.A. Davidson.

J. B. Groh - D.A. Davidson & Co., Research Division

Mark, could you maybe sort of compare and contrast Primus and Centra in terms of kind of the growth outlook and maybe the margin opportunity? And maybe discuss those in the context of some of the other tuck-in ideas, which I'm sure are on your desk now.

Mark Donegan

Yes. You are right. There's a lot of ideas that are on my desk. Well, some of them have gone even deeper than ideas. But what we’re -- what we typically look for in all acquisitions is something that's complementary. If I look at Centra, the complementary comes from the size capabilities that they have, the types of machines they're utilizing, the method of machining. So from that standpoint, it allows us to rationalize. There's certainly some products that Centra will be making that we could probably do a lot more efficiently on a Primus asset. And on the flipside, there is assets that we've done on Primus that probably could be done much more efficiently on the Centra side. We then kind of look at positions on a platform. The fact that they have such a strong position on the 787, 777, the bigger planes fits well into what we look for. So I think that Centra does that. If I look at the ideas that are on the desk, they would offer something that would be beneficial to, or complementary, either different sizes of machinery, there's different types -- we don't have any gantry. Gantries are very good on long runs. We don't have gantry capability. There are other things in line to assembly we don't have. So I'd say that if you look at more of where we want to grow, it will be continued expansion. When I go out and buy another Primus, that has the exact same equipment, exact same capabilities, probably not because I should be able to beat them on my own. So Centra gives us different equipment, different size capabilities, additional kitting. They do a lot in kitting from that standpoint that we can pull through to the Primus side of the business. So they have a good system and machine monitoring and up time. We could pull that across into the Primus side of the business. So there's just a lot of cross-functional improvements that we can get either in terms of machining or scrap utilization or on and on and on.

J. B. Groh - D.A. Davidson & Co., Research Division

So scale, just by itself doesn't do it. You have to have something that's going to fit well with what you've got?

Mark Donegan

Again, if I look at how we've grown this company, we've shied away from buying competition just for the sake of buying it. We've gone out and we bought things that give us a more complete product offering or a different capability or a different skill set and lets us put together a much better product offering to the customer. So if you look at SMC, we didn't necessarily -- excuse me, Wyman-Gordon, we didn't go buy the remaining Wyman-Gordon. What we bought was open die because we don't have open die capabilities. Then we bought ring rolling because we didn't have ring rolling capabilities. Then we bought weld because we didn't have welding capabilities. So we are able to provide more solutions. So now, using that welded ring versus forged ring, we have the ability as the market moves and material prices move, we can swap back and forth between the 2. So we have the solution to both alternatives where we are completely locked down with one of the solutions before. But Fasteners, we didn't have continuous structural bolts won by our industries. We didn't have blind rivet capabilities won by Cherry. So we try to find those areas that grow us, and I would say that everything we're looking at in this space would be complementary to the same thought process.

Operator

Moving on to Tim Hayes with Davenport & Company.

Timothy P. Hayes - Davenport & Company, LLC, Research Division

One of your major competitors in the investment castings put forth a view on the IGT market for 2012 in that they see the airfoil market growing 1% to 2% globally. Now your results through the first quarter of March compared to year ago is low double-digit growth. I'm kind of curious what the disconnect might be? Is it -- I guess first thought was that maybe IGT was slow over the year, but from your remarks, that doesn't seem likely at all. Is this just a simple case where you're taking considerable share, or does this competitor focus only on a specific product within IGT, or I should say application that you're different, or what might be the cause for the difference in the growth that you're achieving versus the minimum growth that they're expecting?

Mark Donegan

Yes, I, obviously, can't answer what they are saying or thinking or seeing. I can -- we have done a good job of kind of going after the platforms that we wanted to go after. I think that we've certainly, over the years, made no bones about our desire to grow share. And I think that, that has all added up to at this moment in time where we are seeing the type of growth we're seeing. Again, I can't answer why they are not seeing or saying they're not going to see it. I can just tell you that our loads sitting in front of us certainly support numbers higher than 1%, 2%.

Timothy P. Hayes - Davenport & Company, LLC, Research Division

A quick one on RathGibson. The exposure to oil and gas, is that primarily rig counts, or is that also distribution?

Mark Donegan

No, there's a fair amount of their product that would go both into rig counts and ongoing production. So it would be utilized in both particular areas. And there is also a lot of opportunity for them to grow in that world. So if you look at things like umbilical cords, they are moving in that direction. But there's certainly a lot more opportunity for them to go. And that's kind of why I say our global footprint helps them kind of pull that product through. But I think as we get deeper into this, Rath has a lot of opportunity to grow in a number of different directions. And again, we see this frequently with businesses that their growth model and what it takes to grow from a sales presence and in infrastructure is not an area that businesses sometimes underneath the private ownership want to take a bite at the apple the way we want to take it. So I think that there is, as you look out 2, 3, 4 years, there's a lot of upside opportunity in terms of market share and growth that a RathGibson can't do.

Operator

And our last question will come from Eric Hugel with Stephens and Company.

Eric Hugel - Stephens Inc., Research Division

In terms of the bone proprietary Fastener gains that you got earlier in the year or late last year, can you talk about -- have you started to see those sort of flow through yet, or is that still ahead of you? And with the fire at Cannon Muskegon, is that an issue that was isolated to this quarter, or are we going to see that again sort of the impact that being down in the first quarter also?

Mark Donegan

Let me start with the second piece of the question first. No, that was a single event that occurred. We got in. We got out. We were down for about a month. The equipment was up and running, and there's no hangover moving into this quarter. In terms of the Fasteners, certainly, I'd say the biggest area we're still waiting for is in that 787. That is kind of that center wing boxes where we really do well and have a very strong position. So that is probably the biggest lagging we are facing right now. So I'd say that if I look out, that's what we're waiting to see. Certainly, the overall distribution in OEMs, we're still lagging that. But if I look at the single biggest item we're still waiting to see, it's that 787 product line that runs through pretty much our Jenkintown aero industry facilities. So that is what we're waiting to see.

Operator

That concludes our question-and-answer session. On behalf Precision Castparts, Mr. Donegan and PCC management, I would like to thank you for joining today's call. 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.

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