Precision Castparts Corp. F1Q09 (Qtr. End 06/30/08) Earnings Call Transcript

| About: Precision Castparts (PCP)

Precision Castparts Corp. (NYSE:PCP)

Q1 FY08 Earnings Call

July 22, 2008, 10:00 AM ET

Executives

Mark Donegan - Chairman and CEO

William D. Larsson - Sr. VP, CFO and Assistant Secretary

Analysts

David Strauss - UBS

Robert Stallard - Macquarie Research Equities

Howard Rubel - Jeffries

Joe Nadol - JP Morgan

Peter Arment - American Technology Research

Ron Epstein - Merrill Lynch

J.B. Groh - D.A. Davidson

Robert Spingarn - Credit Suisse

Cai von Rumohr - Cowen and Company

Harry Nourse - Bank of America

Eric Hugel - Stephens Inc.

George Shapiro - Citigroup

Operator

Good morning, everyone. And welcome to Precision Castparts webcast and conference call to discuss its first quarter earnings for fiscal 2009. As a reminder, you may listen to this morning's presentation and view the accompanying slides in real time by going to www.vcall.com and locating Precision Castparts corp. in the investor events calendar. Additionally, 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 PCC management, the dial-in access line will be open for questions. [Operator Instructions].

And now I'll turn the floor over to Mr. Mark Donegan, Chairman and Chief Executive Officer of Precision Castparts. Please go ahead, Sir.

Mark Donegan - Chairman and Chief Executive Officer

Thank you. And thank you all for listening in. I'm sure you're all familiar with the forward-looking statement and you need to take it into consideration when you are analyzing the following information. I think Q1 overall is a solid quarter, we saw continued growth and we generated again record sales and operating income.

On the sales front, we saw sales growth of 11.2% year end over year growing from $1.65 billion last year to $1.83 billion this year. We saw operating income increase 20.5% versus last year going just under $352 million last year to $424 million this year. We saw margins expand overall for the company from 21.3% to 23.1% this year; and all this generating an EPS of $1.95 versus last year of $1.61. So I think it was a solid baseline to start the year but certainly has a lot to do moving forward.

If you look at the primary drivers for the business, as you'd expect, we continue to see very solid demand from the aerospace side. Again for us the key drivers in the OEM side, we continue to see strong demand on the program that we have good contents. The programs that are important to us either shows good solid schedules or even growing schedules.

The aftermarket, again for us, where we have good market penetration, which is really the later generation more fuel-efficient platforms. And at this time the platforms that we care about are continuing to fly. And we have little content on the early generation planes where it's 737, Airbus 320 family, the MD-80 727. So again, what continues to fly is kind of what's… is very important to us.

Second key driver overall for the company, certainly, has been the power. We continue to see extremely strong demand from our gas turbine business where demand at this point of time continues to outpace our ability for output. And (inaudible) continues to see very solid growth year-over-year.

If I look at this point in time what we're seeing in terms of the balance of the year in terms of our base, we're seeing a good, solid demand on both our IGT platforms and our aerospace platforms at this point in time. So again, the base programs for us look solid at this point in time. On the operating income side, I think we continue to see good leverage across all of our business, but certainly in Q1 we saw very solid results from investment casts and fasteners, and we will go through those later on in the presentation.

I've added a different chart this time to try to better clarify kind of our sales by end market. This is a chart we would like to continue using in the future. If you look at our Q1 sales by market, as you'd expect aerospace being the largest at 52% and it positions us kind of squarely in the target we've said we want to be in that 50% to 55%.

Power continues to grow and was second at 23%. And again, for us it's a very concentrated position in industrial gas turbine, seamless pipe and oil and gas. General industrial came in at roughly 20% it's really spread across chemical, pollution control, medical, pulp and paper.

And the automotive is at 5%. And again, at this point in time the business is kind of holding its own, we're holding flat and it's certainly very challenging North American time. If I will look forward and look at the strength of the company as I would evaluate the company at this point in time, I think that our presence across a good diversified mix of high-end markets is significant. I think we continue to have a very, very solid success in all opportunities in the airline. I think the 787 certainly demonstrates that with the highest position or a content we've ever had on any platform. But equally it's important I think is our ability to drive our capabilities in areas like IGT, seamless pipe, oil and gas. And it gives us a good platform to really face head on whatever challenging times we would see in the future.

Moving into the segments, beginning with investment cast, again, I think they had a good start on a solid Q1. We saw the sales growth of 17.3% versus last year growing from $509 million last year to just under $598 million this year. Our operating income grew by 26.3% year-over-year going from $120 million last year to $151 million this year. We saw good margin expansion going from 23.5% last year to 25.3% this year. If I look at the key drivers, as you'd expect certainly on aerospace front, demand remained very strong. Again, we saw good demand from both the OEM and the after markets and we were able to see record performance levels in terms of productivity gains. We talked about this in the past, our ability to slow down and hiring would help us get good productivity gains. We saw this really across all our facilities. And we gained good leverage in our fixed asset departments from the standpoint of casting and investing.

During the quarter we saw very little demand in investment cast from either the 787 or the A380. But certainly if I look at the 787 moving into production during the next calendar year, I would expect it to become a significant contributor for the next year and beyond. IGT or the internal… the gas turbine continues to be an extremely strong market for us with at this point in time as we stated demand being really above our current capabilities. This is, again, both from OEM and after market. We urgently need our new facility in Ohio along with our expansion in Portland. And again, we've stated this has the ability to generate $90 million of additional sales.

It's important to know we need this not only to support our current demand but also the development of the latest share gains we got across an expanding customer base. So, again, so are the timing you are going to match it very well when the tooling comes in for our new programs is when the new facility comes online. As we look beyond this year, moving into mid-next year and end, we could certainly expect to see North American coming in and adding to this demand.

Forged products saw sales growth from 5.6 year-over-year from $773 million last year to $816 million last year. From last year between the selling price of external alloy and increased internal sale, the sales line is really impacted by roughly $50 million. This would have put us more in the range of 12% growth on a comparable basis. Operating income grew by roughly 7.8% from just under $170 million last year to $183 million this year. And margin expanded from 21.9 last year to 22.4 this year.

If I look at the key drivers in Forged, again, as you'd expect on the sales side, you know, the aerospace demand remain extremely strong and steady. In the quarter also in Forged, we saw very little demand from the 787. And what we're looking at on the Forged side is a very low level of production, so a very low level of activity moving towards the end of this fiscal year.

As we would expect to see as the 787 would then move into more of a production mode, we expect this to be a pretty significant contributor to the forging business at that point in time. The other significant piece certainly has been the power, ex trued pipe continues to be very strong when we saw year-on-year growth of roughly 50%. At the same time our backlog continues to expand. We're now roughly $900 million. If I look back to where this business was, certainly the time I was running Wyman-Gordon in its early stages, I look at the job Jim and the entire team has done down in Houston, I think its just an incredible job they've done, really growing a global demand for this product and again, our footprint continues to expand and continues to be a significant piece of the puzzle. Q2 in forging always faces its typical challenges. These are the same events we have year-over-year… [no audio]

Operator

At this time we've lost connection with our speaker. We ask that you please remain on line and he'll rejoin us as soon as possible. Thank you for your patience.

Good morning. You're on line for Precision Castparts conference call. At this time we're awaiting the arrival of our speaker. We ask that you please remain on line. And Mr. Donegan, your line is open. Please go ahead, sir.

Mark Donegan - Chairman of the Board and Chief Executive Officer

Okay. I have to try to figure out… I apologize for that. We lost our phone. I have to try to figure out where we were. So I think I'll back up a little bit in case ... make sure I go all the way back. So, kind of picking up where we were in forge products, I'll begin again with the power side. Exterior pipe continues to be extremely strong story for us. We saw roughly 50% growth in the year-on-year at the same time we brought our, we saw our backlog expand to roughly $900 million. If I think back to where we started with this business at the time of the acquisition and certainly when I was running, the Wyman-Gordon operation, I think Jim and his entire team have done a outstanding job of growing globally and really continue to spread out footprint.

Q2, we faced typical challenges that we normally face in the forging business. The same events that occur year-on-year over the last two years we had a couple mitigating events certainly two years ago we had the acquisition of special metals in Q2. And then, last year, we saw kind of the continued acceleration as well as added to that the Caledonian operations. The two primary events that occurred are preventative maintenance. These are bringing down our large presses. It's really mandatory that we do as to make sure our presses stay up and running. We typically match these during the higher vacation season to avoid multiple interruptions. And we also have an extended shutdown of our European operations of roughly two weeks. The effect of both the maintenance cost and the loss of leverage is roughly $12 million for Q2.

We also have one other… one of event that has occurred in forging we had an unplanned outage in one of our two isothermal presses. We had an electron exterior that created an overheat situation in the furnace. The press itself and the furnace are fine. However, the tooling package that holds all the tools in has been damaged and we're in the process of evaluating how much of it we can reuse and how much we're going to have to redo. We're looking somewhere in the vicinity of probably six weeks of that one press being down.

Moving on to fasteners, I think the entire fastener team continues to do a very solid job. We saw good sales growth of 14.5% versus last year from $367 million with just under $421 million this year so a good operating income growth of 32.7% from 86.6% last year to just under $115 million this year. We saw solid margin expansion from 23.6 last year to 27.3 this year. I look at the primary drivers behind the fasteners, as you'd expect growth in the aerospace continues to be extremely strong. In fact we grew by roughly 18.5% year-over-year. We saw very strong demand from our customers. It's a little bit more difficult for us to kind of tell where, but we really believe it's coming from both the OEM and the aftermarket. And I think that the entire team has done a good job of effectively leveraging this volume across our assets and seeing good margin expansion. I think we've been successful to date in growing our market share, but we… this is an area we continue to see future upside for us. So taking our constant attack on costs and turning it back around in market and trying to go back and grow our shares certainly has worked successfully for us and will continue to be a constant driver for us.

The other area that we now seen, we've talked about this during the last call and we're moving ahead with it, it is taking or utilizing our automotive assets to drive into a lower end of the aerospace market that quite frankly have been unsuccessful in attacking in the past. I think with the automotive assets both in terms of equipment and we got very capable employees to drive the transition, we've seen opportunity now and that kind of enter an market we haven't been in the past.

On the non-aerospace side, in a nutshell, we've been able to do is really hold our own volume flat during certainly a very challenging time in the North America. And we didn't see any change in this throughout the balance of the year.

Moving into cash, and again, I think we generated a solid cash in the quarter of roughly $223 million. And we now have cash in a positive position versus our debt. And again I think it positions us well to capitalize on the opportunities as they come up. So in summary, I think we continue to see very solid demand from our base programs. Again, we're on, for us the programs to us that matter we have our content, the build rates holding firm or growing.

Aftermarket, if I look at either the current retirement that is out there or what they've announced now is retiring in the future. Today, they are not significant contributors to PCC. And again that's a result of where we got our traction in terms of penetrating the market and kind of the mid-'90s.

And from an accelerated standpoint, certainly the 787 as we exit this fiscal year moving into production will be an accelerator. And through a lesser degree but still there this is the A380 establishing a production rate will be an accelerator to us.

IGT who had kind of said this continues to be a very strong piece of the puzzle. The demand remains very strong. And again, we look throughout the balance of this year, certainly the demand is going to outpace or output capabilities. I think we're well positioned on the high production platform. And very key for us has been the wins over the course of the last six months that really positioned us well in all the advanced platforms and expanded our customer base on the advanced engines. And again, this is going to be hitting development on this as the new facility, so the end of the calendar year '09.

The price demand we see right now remains strong and the backlog really supports two years of production. And on the non-aerospace alloy side we still see market share opportunities in our key areas. So, I think that overall Q1 was a good start. We have a lot to do. We have a lot of opportunities in all fronts in terms of growth, performance and margins. And certainly our goal is to stay focused, stick to the basics and drive through the results we have to drive through. So with that, that ends what I had. Sorry, about the disconnect.

QUESTION AND ANSWER

Operator

Thank you, sir. The phone lines will now be open for questions. [Operator Instructions] And we'll take our first call, I am sorry, our first question today from David Strauss of UBS.

David Strauss - UBS

Good morning. Thanks.

Mark Donegan - Chairman and Chief Executive Officer

How far did you hear the first go-around? Did I missed anything or did…

David Strauss - UBS

No. No. You backed up a little bit past where you had gone. But it was fine.

Mark Donegan - Chairman and Chief Executive Officer

Okay. Good. Thanks.

David Strauss - UBS

It was fine. Mark, your discussions with your customers on the aerospace side, kind of what are you hearing at this point? What are you seeing as far as order activity? Any indication of production rates maybe coming down as far out as you can see, I guess you can see out 9 to 12 months at this point?

Mark Donegan - Chairman and Chief Executive Officer

Yes. On the programs we're on, no, we're not seeing any softening. Again, 787 is one that's kind of through really Q4 and kind of falling over into Q1 we have continued to see some easing of kind of the demand from that standpoint. If I look at overall the programs we're on, we're not seeing any softening. Our customers are still feeling good about their schedules. And I have been with most of them in the course of the last three or four months, and all of them still say certainly from the engine side, which is a key indicator for us, that as the demand still stays very strong at this point in time. Their kind of schedules are locked again that year, year and a half timeframe.

David Strauss - UBS

And if aerospace production rates would come down, how quickly could you transition some of that capacity to some of your other end markets? And how do you think about that in terms of trying to manage what kind of dawn side you might see your margins?

Mark Donegan - Chairman and Chief Executive Officer

Well, I can answer that a couple different ways. The overlap in terms of ... if I look at castings, you know, and look at the two primary end markets would be IGT and aerospace, there is no real ability to swap the two. They're different assets from that standpoint. But again, that tends to be a business we can be very responsive in that. Certainly a large portion of the cost is labor. If I look at forging, the same would hold true on the Wyman-Gordon side that there is some overlap but not to a great degree. We use different assets to same looks really quite than we do for the turbine side. But in our U.K. facility, we would be able to put more pipe through that. That is the same complex; we're just changing between turbine and pipe. That's one we could utilize the assets on.

On the SMC side, we can transition from non-aero product across the arrow assets. We can't transition without a lot of work with the arrow across. So, if the arrow would fall out, we could move some work over. We've identified what those programs are what they're good and would qualify them on certainly some of the alloys that would help that transition. The other thing that feels different certainly at this point in time is our content so significant on the 787 and even if there was a softening at some point in time on some of the base programs on the 737 or the 320 family of product, those same assets for us are capable ... it's the same whether we're doing 787 or the base programs, it doesn't matter for us. The fact we have this pretty substantial backlog out there with the significant context that utilizes the same assets. Start thinking of one, two, three, some narrow bodies coming out, 187 would take, all of the utilize the assets from that standpoint. So, to say that's kind of how we are looking at and what we see.

David Strauss - UBS

Great, thanks. That's great color. I'll get back in the queue.

Mark Donegan - Chairman and Chief Executive Officer

All right.

Operator

And we'll take our next question from Robert Stallard of Macquarie.

Robert Stallard - Macquarie Research Equities

Good morning.

Mark Donegan - Chairman and Chief Executive Officer

Hi, Robert.

Robert Stallard - Macquarie Research Equities

How are you doing?

Mark Donegan - Chairman and Chief Executive Officer

Good.

Robert Stallard - Macquarie Research Equities

Mark, I was wondering if you can focus on the forge division. There is some moving parts there with it. I was wondering if you can give us your latest thoughts on first of all where you think the external nickel sales are going to be going over the rest of the year, the inter company sales and also having pass through is like to progress?

Mark Donegan - Chairman and Chief Executive Officer

If I look at the inter company sales, this tends to be a little added to the confusion, you know, we actually ... some of those sales go into the casting. If you look at some of the benefit of our internal sales from Caledonian or Greenville Metals that works its way back into the casting story, it kind of blends its way over. I would expect to see the internal sales continue to grow. So, as Caledonian gets more revert or we utilize the Greenville Metals to create, extract and create a usable alloy for us, I would expect to see those internal sales grow. On the nickel front or the alloy cost front, I looked yesterday. Q2 last year was a high point that we hit. So, I would expect to see the delta compared to year-over-year grow in Q2 in term office the price we were getting versus the price.

And then as we start going through Q3 and Q4, that gap will start to narrow. And I think its going to be by next Q1 it's going to be on an equal basis. What we're seeing on an alloy standpoint, and to your point, a lot of moving parts; nickel's coming down and it's kind of stabilizing in that $9.5 to $11 range. Certainly there is some other moving pieces, chrome's going up, cobalt tends to be very volatile.

But, in general, what I'd say is that gap continues to grow in Q2 and then it starts to narrow Q3, Q4 and kind of brings itself down to a baseline in Q1 of next year.

Robert Stallard - Macquarie Research Equities

Putting all this together, it might be reasonable to expect lower revenue growth in Q2 and then something more like Q1 here?

Mark Donegan - Chairman and Chief Executive Officer

Yeah. Yeah. I think that's probably a very reasonable assessment.

Robert Stallard - Macquarie Research Equities

Secondly, incremental margins you had a very good quarter for that. Do you think it's realistic to start looking at something better than your 30% target going forward?

Mark Donegan - Chairman and Chief Executive Officer

You know, I think that 30% is a good number to use. You and I have this conversation off and on. But there are some areas, the castings and fasteners did extremely well. I think that forgings, the alloy piece finding lower cost lever for us tends to be a moving target. If we find more, you know, get our hands on more, we can do better. If we find less, it kind of puts pressure from that standpoint. So I think its kind of… that's why I say… I think the blended rate's okay. I think that certainly fasteners and castings has to get some good upside opportunity too. But it comes with a lot of hard work but I think 30 is a good number to use.

Robert Stallard - Macquarie Research Equities

And just, finally, on the acquisition front. You got net cash on the balance sheet here; do you feel any sort of temptation to start buying back stock?

Mark Donegan - Chairman and Chief Executive Officer

If I saw a lack of ideas and I'm not saying blue-sky ideas, so things that make very, very, very solid sense for us, things that give us a good cost position, grow our market basket, expand our portfolio offering, again, all around our core, I think if we either didn't see the opportunities or even in conversations if the answer was no, no way, never, never, never, and I think then at that point in time we have to reevaluate. I think the fact that we do see good opportunities, I think there are combinations that makes sense coming together. I think it makes most sense that certainly with the challenging economic times that we want to make sure we're positioned very well to do what we need to do as it comes up. And I think that as long as I feel those good ideas are there, it probably makes sense for us to go. If something changes, if conversations tend to halt or no, never or somebody else buys something we're interested in, at that point in time we may need to reevaluate.

Robert Stallard - Macquarie Research Equities

Okay. Thanks a lot.

Mark Donegan - Chairman and Chief Executive Officer

Yeah.

Operator

And we'll take our next question from Gary Leibovitz [ph] of Wachovia Securities.

Unidentified Analyst

Good morning. Mark, could you give us a sense of what a six-week shut down of a forging press might have, how that would impact revenues?

Mark Donegan - Chairman and Chief Executive Officer

Yeah that'd be somewhere probably in terms… I don't know… I know probably more the EBIDT, it's probably in that $5 million to $6 million range of EBIDT.

Unidentified Analyst

Okay. Also if you have discussions with your customers regarding the demand… potential demand for North American customers to order IGTs? Could that be this year? Is that a 2009 event? And how soon would you be able to satisfy that demand given your backlog?

Mark Donegan - Chairman and Chief Executive Officer

Yeah always there was a… the other thing I wanted to go, I wanted to try to say on the forging press side, that would be a combination of the cost, maintenance and the lost revenue. And so that's kind of a blend of repairing and all that type of things so that's where that number came from.

Unidentified Analyst

And on the North American IGT demand?

Mark Donegan - Chairman and Chief Executive Officer

On the North American, kind of what we're hearing now, a lot is somewhat dependant on how much demand this particular summer puts on. But what we're hearing right now is probably towards the end of next calendar year is when we're expecting it to kind of come into play.

Unidentified Analyst

Okay. And one last one, any thoughts to increasing voluntary pension contributions with your strong balance sheet and probably negative returns year-to-date on your plans?

Mark Donegan - Chairman and Chief Executive Officer

We're over funded at this point in time.

Unidentified Analyst

Thank you.

Mark Donegan - Chairman and Chief Executive Officer

Yep.

Operator

And we'll take our next question from Howard Rubel with Jeffries.

Howard Rubel - Jeffries

Thank you very much. Mark, could you just update us on CapEx at the moment? Has it changed with your need to accelerate the IGT business?

Mark Donegan - Chairman and Chief Executive Officer

No. Kind of the CapEx numbers that we've been given included that. You know, also I think kind of the CapEx in that 230 to 250 is probably a reasonable point that we're going to come in at including the expansion. What may change though, Howard, and again, it wouldn't surprise me if we find ourselves at the end of this year. So as we're bringing on the new facility of actually looking and deciding whether we need to make an addition to that new facility right away, which would… again, it wouldn't put as much capital under because we put the infrastructure in the race that basically supports three plants which we have one on the site now. So the infrastructure of the power, the power station, this will be in place. But it wouldn't surprise me if we have to make that decision. And again, it's a decision we'll make with our customers. But we'll probably look facing that decision in that January, February, March time frame.

Howard Rubel - Jeffries

Thank you. And then you had more, I'll call it insourcing of product and a chunk of it was SMC. How do you think about what you're doing at SMC and we'll call it sell internal versus sell external. Are there still a substantial amount of external opportunities ... go ahead, I'm sorry.

Mark Donegan - Chairman and Chief Executive Officer

If you kind of ... certainly sitting in the job and you know the way we run this company, one of my frustrations when it comes from the opportunity just kind of across the board, the opportunities we leave on the table. I'd love to tell you every single operation is running smooth. But the number of opportunities we have are abundant. Certainly one of the areas I'd like to see us continue to be successful in is growing our non-aero SMC. So that the upside for that still remains fairly robust. Again, it's in some of the core, it's in the power, chemical, so it's in key areas we want to grow high-end nickel applications. So, I think we've been pretty successful. Look at the opportunity; I think it's a lot more. So, one thing that will continue to grow on the inside though, again, getting low-cost revert is essential for us. And that goes across our castings and our forgings business. So, the internal sales growth will continue a lot from Caledonian and Greenville Metals. Again, combining those two in the past where we couldn't have used something, we now can go out and find dust or floor droppings and put them in the Greenville and refine them to a usable state be it moly, nickel or something like that. So, I would continue to see that go.

Howard Rubel - Jeffries

And then last, I know the aerospace question was sort of asked. But if you were to look at your plan, your business plan for the rest of the year versus what you started at the beginning of the year, what do you think are some of the changes that have occurred? I'll just leave it at that.

Mark Donegan - Chairman and Chief Executive Officer

The base businesses are kind of holding like we had projected. The 787, we probably had a little more end of plan than has transpired at this point in time. And that's kind of the two categories I'd put them in at this point in time.

Howard Rubel - Jeffries

Thank you, Mark.

Mark Donegan - Chairman and Chief Executive Officer

Yes.

Operator

And we'll take our next question from Joe Nadol of JPMorgan.

Joe Nadol - JPMorgan

Thanks, good morning.

Mark Donegan - Chairman and Chief Executive Officer

Hi, Joe.

Joe Nadol - JPMorgan

Mark, I just would like to drill down, I will just start with little bit more in the forged incremental margins. If you add back the $50 million which is the headwind, which presumably has no profit attached to it, your incremental margins there were in the mid-teens. And that also doesn't factor in the benefit you got from Caledonian year-over-year. So I'm just wondering, is that the right way of looking at it? If that's true, where were the pressure points?

Mark Donegan - Chairman and Chief Executive Officer

Well, I think that some of the things that don't get counted in there, again if you look at what Greenville Metal does and what Caledonian does, it benefits the casting world. You certainly see some of that overflow into the casting world. Probably, the biggest, again, problem we're fighting is getting enough revert, which would be low-cost scrap. If I look at our revert percentage a year ago to where it is now, we're down. So, certainly that puts cost pressure on us. What we're finding now is kind of looking at other avenues to get a lower cost material. And again, some of it's coming also from the fact that we're getting into new applications so there's not enough of a revert stream even establishing some of those cases. So, probably the biggest delta [ph] is our ability to continue to get low-cost alloy.

Joe Nadol - JPMorgan

Okay. If you think, I mean what's your forward-looking view on that, if you have one, through this quarter, next quarter? Do you think that's going to trough or you have no visibility. Can you build out [ph] a revert?

Mark Donegan - Chairman and Chief Executive Officer

No, we actually ... revert, per se, its go out and find exact substitutes or exact what we're looking for you. You fight a lot of battles because some of this materials can go into stainless steel, and you know what you know what the stainless steel market doing right now. But if I look at the other opportunities we have, we do have other opportunities. We actually laid this in by quarter. So, finding material substitutes are key. I kind of look at Q2 being somewhat flatten. I think we have ability to kind of generate either get access to the revert we want or substitutes going into Q3 and Q4. So, I'd expect to see some of that pressure lessen as we go into Q3 and Q4.

Joe Nadol - JPMorgan

Okay. And then the second question, one of your competitors on their earnings call mentioned they saw a lot of inventory in the channel on 787. And that was basically saying the same thing as you, which is that 787 volume was disappointing for that reason. Do you think that's the reason? And how long do you think that might last?

Mark Donegan - Chairman and Chief Executive Officer

Again, if you look at kind of the thrust we're on, we tend to ... I don't know who the other person was, but --

Joe Nadol - JPMorgan

Alcoa.

Mark Donegan - Chairman and Chief Executive Officer

We tend to have some fairly long lead time items. Certainly to get into large structural castings and some of the landing gear. So, I think what happened is we certainly were going through a development curve very aggressively recovering up speed and we had to start moving into production because if you go back to what the plan was, we had to go. I think when there was kind of was a reset of what can happen in terms of production, that's kind of driving it. For us, it appears to be nothing more than that. I mean, if I go talk to our customers, again, we're pretty much due to design, from our standpoint we've got development. So it's not surprising me that we've put the sets out there and we had to kind of throttle back a little bit. We want to make sure we keep going to some degree because we want to keep the process efficient. There's nothing less efficient for us than where we are start and stop and then restart. So it's kind of really defining that very, very, very low level. And then again, kind of I look at the schedules today, as we come into that Q4 for us, you start seeing that being a reacceleration point for hitting… kind of moving into production with the lead times backed off.

Joe Nadol - JPMorgan

Okay. Thanks Mark.

Operator

And we'll take our next question from Peter Arment of American Technology Research.

Peter Arment - American Technology Research

Hey, Mark, nice quarter. Actually, you hit all my questions. Thanks.

Mark Donegan - Chairman and Chief Executive Officer

Okay. Thanks, Peter.

Operator

And again, if your questions have been answered [Operator Instructions]. We'll go next to Ronald Epstein of Merrill Lynch.

Ron Epstein - Merrill Lynch

Hey good morning, guys. I'm very curious about your comments on the auto to arrow. If you could give us some more color on that. Kind of which markets you're thinking of and which of your businesses you think potentially could do this.

Mark Donegan - Chairman and Chief Executive Officer

There's really a facility in Cleveland, which is our high-end critical automotive fasteners. Believe it or not if I look at the qualifications, the capabilities, the tolerance levels, they're very comparable in terms of a critical automotive fastener to a low-end. When I say low-end, it's still going to be the same type. It's going to be some sort of bolt or a lock washer or whatever the case may be. Bit it's going to be something that has a lower tolerance level. So if I look at Jenkintown or an AIC which would tend to be our very, very high-end aerospace applications that carries that overhead, we've typically not been able to be successful. If I look at the leanness of our automotive plant, the way it's set up, the high volume runs, the automation in terms of inspection, it lends itself to a lower cost structure. And if I match up kind of that low-end aerospace, what the demands of that are against this, it tends to be a very, very good match to the facilities. It's not going to be a quick transition, so it's not going to happen in six months. But we actually have received our first order. So that's a significant kind of event for us. And we'd expect to see it transpire over the next two to three years.

Peter Arment - American Technology Research

Okay great. And then just to follow up on a question I guess that Rob asked on M&A. What are you seeing from a valuation perspective right now? Are sellers readjusting their expectations given what's going on in the market or not?

Mark Donegan - Chairman and Chief Executive Officer

I think there's a number of things that are going on. Certainly I think the valuations have come down; the realizations, are they going to stay there or not it's the battle you're fighting right now. Again, I think that some other things out there. The certainly I think that the politics comes into play from a standpoint of what's going to happen to capital gains tax and all those types of things. I think they're real that certainly get into a person's mind. And then kind of where are we in a cycle? Those are all that type of things that certainly we try to bring into the equation. Yeah, I think that evaluations have in fact come down. It's just a matter of can you get somebody to believe that's kind of the real point to be at this point in time.

Peter Arment - American Technology Research

Okay great. Thanks Mark.

Mark Donegan - Chairman and Chief Executive Officer

Thanks.

Operator

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

J.B. Groh - D.A. Davidson

Good morning, Mark.

Mark Donegan - Chairman and Chief Executive Officer

Hey J.B. how are you doing?

J.B. Groh - D.A. Davidson

Good. I'm going to hammer on Ron's question a little more on this auto to arrow. Would you care to put like a revenue opportunity number on that? When I look at, if auto's only 5% of the total sales, obviously the revenue opportunity is going to be much greater on the aerospace side. Could you maybe flush that out a little bit more?

Mark Donegan - Chairman and Chief Executive Officer

If I look over the next couple years if we could get a run rate of $10 million to $15 million I think it'd be a good starting point for us. You know, it's going to be… the amount of opportunity is going to be in the tens of millions of dollars. But I think that if we can get our footing in, again, the fact we've now gotten an order is kind of a key thing for us. But if we could be at a run rate of $10 million by the end of calendar year… excuse me, by the end of fiscal year '10, that's kind of what we're targeting right now.

J.B. Groh - D.A. Davidson

Okay. And then just to clarify on this isothermal outage that happened in Q2 or was that?

Mark Donegan - Chairman and Chief Executive Officer

It just happened four days ago.

J.B. Groh - D.A. Davidson

Okay. So now is the $5 million to $6 million EBIDT impact that you mentioned, is that included in this $12 million forging head wind or is that in addition to?

Mark Donegan - Chairman and Chief Executive Officer

No, that's in addition. The other two are planned events that occur on a yearly basis. This one is an unplanned. Again, I don't know the magnitude. We're trying to do… we have to do actually an analysis of each piece. If you imagine this tool dye set, it's stacked of plates of varying alloy types configurations. So we have to go and analyze each and every plate to know kind of what its capabilities are at this point in time. So that's kind of a rough range that I'm giving. If it changes drastically, obviously we'll basically have to go somewhere about that. There is an insurance claim. There's a deductible. So we're kind of analyzing all that right now. But I think that that's probably a reasonable number to use. We may come up, depending on how much it is, we may be able to come up to… there are certain products that require less tonnage. We may be able to come up and do something in the interim. But again, it's so new, we're trying to analyze where we are now. Just trying to give some perspective as to what it is.

J.B. Groh - D.A. Davidson

Okay, good. But is that the kind of situation where a competitor could do that work or are you locked in there?

Mark Donegan - Chairman and Chief Executive Officer

You know, from the standpoint of where we, you know, again, if this would happen six months ago, we certainly would have put our customer in a world of hurt. We had made great strides and were pretty much catching up. So, at least at this point in time it's come at a good time if you can have a good time to have an unplanned outage like there. So, I think that we'll be okay to support our customer. Again, we'll identify what we can do. If we can get up with some of the lower end, we can do the low end and let our other press dot high end. So, those are all the things, we got to balanced out. But I don't think we are at risk of losing anything at this point in time in world.

J.B. Groh - D.A. Davidson

Okay, great. Thanks, Mark. All my other questions have been covered.

Mark Donegan - Chairman and Chief Executive Officer

Okay, Great. Thanks.

Operator

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

Mark Donegan - Chairman and Chief Executive Officer

Hello, Rob.

Robert Spingarn - Credit Suisse

Good morning.

Mark Donegan - Chairman and Chief Executive Officer

Good, thanks.

Robert Spingarn - Credit Suisse

Back on M&A for a second. You talked about valuation. Is it just an issue of getting the right price or is there any strategic difference today perhaps if you were looking at a vertical type of target, is there any resistance maybe to buying something that would look like an SMC given the macro economic environment?

Mark Donegan - Chairman and Chief Executive Officer

No. Again, I think that we laid the strategy out, almost five years ago now, you know, we're kind of saying what do we want? How we are going to get? Obviously, pull them out and kind of put companies in by name. So, we've been lucky in that we've been kind of going down, ticking off sequence of companies we want. So no, there's not been anything that's changed. I think where your question comes into play, is what price do you pay? I mean there is certainly when there is you fall in a market a year ago, I think look and say there's just no way these properties are worth kind of what they seem to be worth. It's kind of the belly bite. As you come down the other side of it now, it's certainly trying to present a reasonable case to a potential seller as to either why it is what it is or why the combination of two companies could make better sense or for the combination of certain groupings create a better offering for them. Those are the kinds of conversations you get into at this point in time. But no, I don't think anything's really changed than what makes sense for us. What we stayed disciplined to is what we think the right price to pay that makes sense for us.

Robert Spingarn - Credit Suisse

Okay, fair enough. Going back to chart No. 4, this is that new pie chart you talked about with the end markets.

Mark Donegan - Chairman and Chief Executive Officer

Yes.

Robert Spingarn - Credit Suisse

The market's making brood generalizations across the group with regard to where shares settle these days. Could you give us some more specifics on that blue piece in aerospace, how that splits out vis-à-vis aftermarket, military and so on?

Mark Donegan - Chairman and Chief Executive Officer

You know, the commercial side was 78%. The military was the balance. And the aftermarket in the commercial was what?

William D. Larsson - Senior Vice President, Chief Financial Officer and Assistant Secretary

Aftermarket is generally about 10% of the total aerospace picture.

Robert Spingarn - Credit Suisse

10% of the total aero.

William D. Larsson - Senior Vice President, Chief Financial Officer and Assistant Secretary

Yeah. So in other words, the other 45% would be split between OEM, commercial and military.

Robert Spingarn - Credit Suisse

Okay. I think that's key to point out that that's a fairly small part of the business. And that's generally contained to castings, right?

Mark Donegan - Chairman and Chief Executive Officer

Yeah, the bulk of it is castings. There's some forging. Some of the disk but certainly the largest piece of the puzzle by far is the casting businesses.

Robert Spingarn - Credit Suisse

Okay. So, that's very helpful.

Mark Donegan - Chairman and Chief Executive Officer

And also, the one thing, Rob, we don't know is fastener, again, it's not a bill of material item, we do not get a line of sight as to the aftermarket. So, I can't really tell you, but there is an aftermarket component in the fasteners. But I can't tell you what it is.

Robert Spingarn - Credit Suisse

Do you have a rule of thumb in fasteners or is there one in the industry that says for every dollar of OE produced in aerospace fasteners there's an aftermarket?

Mark Donegan - Chairman and Chief Executive Officer

If there is, no one can give me an intelligent answer. So, I would say that if it's there, we're not smart enough to know it yet.

Robert Spingarn - Credit Suisse

Okay. And then just in general on the revenues for the year, the streets out there about $7.65 billion, you've talked a lot about moving pieces in the second quarter and so on. That comes out about 11.5% growth. And I know that input pricing is going to affect that a bit and I suppose capacity cuts in the December quarter, etcetera. But is that a pretty reasonable type of number? What that suggests is, as you said, slower growth there this September quarter but then reverting back to a first quarter-like growth for Q3 and Q4.

Mark Donegan - Chairman and Chief Executive Officer

I think that for a year is a reasonable number to use. Again there, are some moving pieces. There's going to be some alloy depending on alloy price is up or down. But I think that's a reasonable number to use.

Robert Spingarn - Credit Suisse

And are you trying to suggest to us that we would have a modest sequential downtick in September revenues from June?

Mark Donegan - Chairman and Chief Executive Officer

You know, I, again, what I'm telling ... what I'm stating is that we have got costs that are in Q2 that are always there that if it's difficult to overcome that cost structure when you bring major prices down and shut down major complexes for two weeks in Europe. We do set up inventory levels coming into those because we have to make sure we deliver to our customers and they don't necessarily correspond to what our downtime plans are. So I don't think you're looking at as much sales as you're looking just at the cost model.

Robert Spingarn - Credit Suisse

I see. Alright thanks for the clarification. Thanks, guys.

Mark Donegan - Chairman and Chief Executive Officer

Okay.

Operator

And we'll go next to Cai von Rumohr of Cowen and company.

Cai von Rumohr - Cowen and Company

Thanks a lot. Your margins in Forge were down 40 basis points from fourth quarter and yet, you had more internal sales and you had $5 million less material pass-throughs. So why did that occur? Was that the impact of lower external nickel prices? And if so, what percent of your external nickel alloy sales are priced on the time of delivery?

Mark Donegan - Chairman and Chief Executive Officer

Probably the biggest piece of the puzzle is we still had the availability of lower cost material in Q4 more than we did in Q1. So that's probably the most significant piece of that puzzle. The bulk of our alloy sales at SMC are priced in effect. So at the point in time that we basically melt the alloy, the price is established at that point in time.

Cai von Rumohr - Cowen and Company

Okay. So that… so essentially it was just having more lower cost material in the fourth quarter and the absence of that in the first quarter.

Mark Donegan - Chairman and Chief Executive Officer

Yeah.

Cai von Rumohr - Cowen and Company

Now, normally I guess you made this huge point about how margins are down and forged in the second quarter, you know, you have those cost pressures. Last year you were down 20 bit sequentially. If I go back, you know, just years and years, the margins really weren't down. So, but now if you also have this extra unplanned outage, how much, if they were down 40 bit sequentially from the fourth to the first, should they be down more than 50 bits?

Mark Donegan - Chairman and Chief Executive Officer

I can only… I don't tell you what each one is. While I just give you the data and you're going to plug them in your model. So they've got to give me the proper moving pieces to that model.

Cai von Rumohr - Cowen and Company

Right. But the magnitude's important. I mean, for example, is it possible with the unplanned outage that we're now looking at a second quarter where the earnings would only equal the first? That would be… it kind of looks like when you put the pieces together that's where you might come out.

Mark Donegan - Chairman and Chief Executive Officer

Again, you know, we don't get in a habit of giving specific guidance. I've told you that the elements are there's $12 million roughly between planned maintenance and lost leverage. And then we have the unplanned that's somewhere in the vicinity at this point in time of roughly $5 million. That's…

Cai von Rumohr - Cowen and Company

Let me ask you this way; is the unplanned… is the planned items, are they different proportionately than they would have been in prior years?

Mark Donegan - Chairman and Chief Executive Officer

Again, we kind of went over that. In fiscal year 2007 we brought SMC in. So we had this massive operation that came in.

Cai von Rumohr - Cowen and Company

I'm just saying at those costs. I understand the impact of the…

Mark Donegan - Chairman and Chief Executive Officer

The costs typically run in that range.

Cai von Rumohr - Cowen and Company

Okay.

Mark Donegan - Chairman and Chief Executive Officer

Yeah. They typically run there. We've just have had other items that have occurred certainly significantly in the last two years that have kind of mitigated that.

Cai von Rumohr - Cowen and Company

Okay. And then the other question is the tax rate was 34.7% in the first quarter. That's higher than I or maybe some others had modeled. What should we model for a tax rate for the full year?

Mark Donegan - Chairman and Chief Executive Officer

That's probably good for the year.

Cai von Rumohr - Cowen and Company

34.7%?

Mark Donegan - Chairman and Chief Executive Officer

Yeah.

Cai von Rumohr - Cowen and Company

Okay. Terrific. Thanks a lot.

Mark Donegan - Chairman and Chief Executive Officer

Okay, Cai.

Operator

And we'll take our next question from Harry Nourse from Bank of America.

Harry Nourse - Bank of America

Morning.

Mark Donegan - Chairman and Chief Executive Officer

Good morning.

Harry Nourse - Bank of America

Could you tell us how the Caledonian acquisition is going compared to your original case for it?

Mark Donegan - Chairman and Chief Executive Officer

I think it's exceeded the original case, but it's not moving at the speed that certainly I would like it to move. What's happened is as we've gotten in… we certainly have seen it be able to spread its tentacles a lot deeper than we thought into the casting world. So what we're trying to do now is kind of establish operations around some of our casting facilities that we can capture all of the revert and pull it through to whatever the most effective part be it back to Greenville metals or Huntington or whoever it may be. So I think that it's done what we've wanted it to do. But it's not moving as quick as we'd like it to move based on the opportunities we've seen since we've had it.

Harry Nourse - Bank of America

And on the IGT capacity, obviously you've got the stuff coming on line later this year and into the next year. Do you expect there to be a passing of the bat on if you like the demand between international and North America or do you think you'll have to add future capacity further down the line?

Mark Donegan - Chairman and Chief Executive Officer

Well, if it would hold up… if the international site would hold up the way it is today and North America came in, we would have to put in additional capacity. And I think that's a decision point we're going to be faced with towards the end of this fiscal year. So again in that January, February, March timeframe I think we're going to have to look at is the international holding up steady through calendar year '10 and '11. And then what does it look like overlaying North America? Today if I had to say what we're going to have to do? I'd say we'll probably get to put another plant and we'll see that holds true though.

Harry Nourse - Bank of America

Okay. And also just on the A380, its sounds really there's not much of an indication about a revised delivery schedule there; is that correct?

Mark Donegan - Chairman and Chief Executive Officer

Yeah. We've not gotten what I would consider a good, steady demand schedule put in place yet. We certainly see sporadic but nothing that says a bill rate of x month after month after month. We haven't gotten that yet.

Harry Nourse - Bank of America

Sure. Thanks very much.

Mark Donegan - Chairman and Chief Executive Officer

Okay.

Operator

And we'll take our next question from Eric Hugel from Stephens company, Incorporated.

Eric Hugel - Stephens Inc.

Good morning, Mark. How are you doing?

Mark Donegan - Chairman and Chief Executive Officer

Good, you?

Eric Hugel - Stephens Inc.

I am doing well. With regards to the Iso press being down, you said $5 million to $6 million of impact. Would we expect most of that to be made up in the third quarter as you deliver the product?

Mark Donegan - Chairman and Chief Executive Officer

I would say all except for the maintenance side and whatever we're going to have to do in terms of replacing that dye block. The volume side of it, yeah, I would expect that to come back.

Eric Hugel - Stephens Inc.

And may be would that Iso press would that down affectively anyway for a week because of maintenance?

Mark Donegan - Chairman and Chief Executive Officer

No, because that was a new press. Of the ones we probably would not have brought down. It's only been in place for a year.

Eric Hugel - Stephens Inc.

Okay. With regards to, I guess last quarter you talked about SMC supplying around 40% of Wyman's nickel material. Is that still, are we still in that range?

Mark Donegan - Chairman and Chief Executive Officer

Yes, that range or a little less.

Eric Hugel - Stephens Inc.

And finally, with regards to the fastener margins, you know, it looks like, just looking at that time, you continue to see good growth. I'm just trying to figure out whether there was anything sort of mix wise or anything that we shouldn't be looking at that as sort of a base from which to continue to grow.

Mark Donegan - Chairman and Chief Executive Officer

No. There was nothing drastically out. It was -- you know, it tends to be we're seeing good demand on certainly our more complex higher valued aerospace product. We're seeing a growth spurt right now. Other than that there's nothing really out of the ordinary.

Eric Hugel - Stephens Inc.

You wouldn't expect those sort of things to change so you can think about that 27.3 as sort of a good base from which any incremental takeouts would continue to grow those margins.

Mark Donegan - Chairman and Chief Executive Officer

I think there's certainly opportunity in the future to continue to grow those margins. They all face a challenge in Q2. They all have European operations. As a general rule, I think that fasteners still have room to grow. It's not as though, and my buddy Steve and his team are probably cringing, but it's not as though every plan is running -- you did a review. There's still an opportunity. There's still opportunity in scrap and rework and yield and group work and productivity. They still face a lot of productivities. They've dawn extremely solid job of hitting it. There's still more to do too.

Eric Hugel - Stephens Inc.

Great. Thanks a lot, Mark.

Operator

And we'll take our next question from George Shapiro of Citi.

George Shapiro - Citigroup

Mark, in the forgings area again, it would look like that SMC sales were down $50 million year-over-year. That may be all the $50 million you spell out between internal sales and nickel pricing. I was wondering if that's about right.

Mark Donegan - Chairman and Chief Executive Officer

I don't think that's, right. We don't -- again, we don't break out special metals from. But if I had that 50 back in, you're looking at a growth rate in the forging group of roughly 12%.

George Shapiro - Citigroup

But you mentioned a type that grew 50%, so that probably grew $45 million or $50 million. Caledonian was $35 million probably in the quarter. You mentioned that aerospace was relatively steady which I assume means relatively flat. So, if you just add those numbers up you wind up with SMC affectively being flat. If you x out the $50 million, you're down by $50 million. So, I was wondering where I was wrong in those numbers.

Mark Donegan - Chairman and Chief Executive Officer

You know, I'm trying to figure out a way to give you the answer you want without separating what part I mean. I am not going to tear apart SMC from the other part of the puzzle. So…

George Shapiro - Citigroup

Okay. And how about the margin in SMC, would that have been down a little bit year-over-year?

Mark Donegan - Chairman and Chief Executive Officer

I'm not… again, I'm not going to tear apart the forging group and its individual segments.

George Shapiro - Citigroup

Okay. Let me try a different question then. You mentioned that OE and aftermarket in aerospace and forgings were relatively steady or flat. Why would that be as opposed to the growth you saw in the other businesses? Just 787 related?

Mark Donegan - Chairman and Chief Executive Officer

Yeah. I didn't say that the aerospace side of business was flat.

George Shapiro - Citigroup

Well, maybe define what you mean by steady then.

Mark Donegan - Chairman and Chief Executive Officer

In line with the bill rates that the base aerospace business will be seeing.

George Shapiro - Citigroup

Okay. And then one last one, could you split out the $50 million between internal sales and nickel pricing?

Mark Donegan - Chairman and Chief Executive Officer

Yeah, it was roughly 20 internal and the balance would be pricing.

George Shapiro - Citigroup

And where you expecting internal sales to grow to in Q2 to Q4?

Mark Donegan - Chairman and Chief Executive Officer

I don't exactly know but they'll continue to grow. And again the primary driver behind that is going to be feeding our own wire mills, feeding the lower costs, so out of Greenville and out of Caledonian. I don't see a whole lot of change in terms of the bill-it side going into Wyman-Gordan Forging.

George Shapiro - Citigroup

Thanks a lot.

Mark Donegan - Chairman and Chief Executive Officer

Okay, George.

Operator

And we'll take our final question today from Eric Ridner [ph] of George Weiss.

Mark Donegan - Chairman and Chief Executive Officer

Hi, Eric. Not there.

Operator

Sir, please check your mute button. Mr. Ridner [ph], please check your mute button. We're unable to hear you.

Okay. And hearing no response, I will conclude today's conference call. On behalf of Precision Castparts Mr. Donegan and PCC management, I will I'd like to thank you for joining the call today. As a reminder the webcast and call has been recorded and will be available on Precision Castparts' website at www.precast.com for approximately 30 days. This concludes today's meeting. Thank you for your participation and you may disconnect at this time

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