Precision Castparts (PCP)

Q3 2012 Earnings Call

January 26, 2012 10:00 am ET

Executives

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

Mark Donegan - Chairman, Chief Executive Officer and President

Analysts

Kenneth Herbert - Wedbush Securities Inc., Research Division

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

Richard Tobie Safran - Buckingham Research Group, Inc.

Noah Poponak - Goldman Sachs Group Inc., Research Division

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

Robert Stallard - RBC Capital Markets, LLC, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Jason M. Gursky - Citigroup Inc, Research Division

Carter Copeland - Barclays Capital, Research Division

Heidi R. Wood - Morgan Stanley, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

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

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

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

David E. Strauss - UBS Investment Bank, Research Division

Presentation

Operator

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Previous Statements by PCP
» Precision Castparts' CEO Discusses Q2 2012 Results - Earnings Call Transcript
» Precision Castparts' CEO Discusses Q1 2012 Results - Earnings Call Transcript
» Precision Castparts' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Good morning, and welcome to Precision Castparts Webcast and Conference Call to discuss its third quarter 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 remarks by members of PCC management, the dial-in access lines will be open for questions. [Operator Instructions] I will now turn the floor over to Mr. Mark Donegan, Chairman and Chief Executive Officer of Precision Castparts.

Mark Donegan

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

I think Q3 on one end, it was a solid improvement versus last year. But if I really look at it in total, it's really one more step in a continuing upward trend. If I look at the company in total, on sales, we grew roughly 14% versus last year, going from $1.59 billion last year to roughly $1.82 billion this year. We saw operating income increased 18.6% versus last year, going from roughly $387 million last year to $459 million this year. And we saw operating margins expand from 24.3% last year to 25.3% this year. And all this generated an EPS continuing operations of $2.12 versus last year of $1.80.

If I look at the major drivers for the company, on the sales front, certainly, you'd expect we continue to see strong aerospace growth in our Castings and Forging businesses where we increased by roughly 14%. Now if I look at the key drivers in that -- those 2 segments, we saw a solid aftermarket growth of roughly 25% and we also saw external sales increase of 10%, and this is mainly from our Cannon operation.

Compared to last year, we did have an increase in both segments on the build rates, but this is kind of a carryover from the acceleration we saw in Q1 and Q2. But certainly, on a Q3-Q3 comparison, that was in there. And we held steady on the 787 freights in each one of those segments.

We did see the beginning of our Fastener recovery, and our core businesses -- in our -- excuse me, our core Fasteners with about a 2% improvement versus last year. However, in those core Fasteners, we are still lagging on the current build rates. And on the 787, and I'll get in this a little more detail on Fasteners, we are lagging drastically, the build rates in where the castings and forgings are.

On IGT, we saw good growth of 10% versus last year, on the flipside providing headwind. We had last year, as we were originally pulling through the Chengde product to get into markets that they hadn't been in, we were doing a buy and resell from Chengde through Houston into the marketplace and pulling that through Houston. We have been transitioning from that to go and direct from Chengde, and that was a $20 million drop versus last year, Q3.

We talked about in the past, too, we also continued to redirect more of our resource towards supplying our internal operations, and we saw 35% increase in that. And basically, that's displacing some of the General Industrial. Again, we'll get into more detail on that as we go through the Forged Products. We had a benefit from our acquisitions of roughly $150 million versus last year. And then finally, on the metals versus last year, we had $51 million higher in both material and higher contractual pass-through in selling prices of our 3 primary mills.

If I look sequentially on 4 fewer manufacturing days, and I'll get into each segment what that 4 manufacturing days kind of was worth, but if I look at sequentially, we saw Aerospace up 1% versus Q2. And again, this is on the strong increases we have seen in Q1 and Q2 prior to that.

IGT sales remain flat. We did receive a benefit in the quarter of Primus, Tru-Form and PB compared to Q2. If I look at the major drivers and operating income, certainly, we continue to see solid leverage across our operations as volume came through. And some of the key drivers for us is we have been able to hold or, in some cases, improve the revert levels, and I think that's Caledonia and the search in the ends of the world to find and revert force. In our labor-intensive operations we saw strong productivity gains. And we did see, again, a significant benefit from the increase in our own internal supply of our materials versus the outside.

All this helped to overcome headwinds from the dilution from higher metal, which put pressure on our margins by 0.7 percentage points and, certainly, the inclusion for the last year of the lower margin acquisitions. I think, again, it was the third quarter of record earnings, I think it really just provides another firm foothold as we climb the higher performance levels moving forward.

If I look at the sales by segment, Aerospace went from 57% last year to 64% this year. Certainly, an element of that was our recent acquisitions. The bulk of them came in the Aerospace side. Power went from 23% last year to 19% total of this year. And General Industrial went from 20% to 17%.

If I look at the organic growth versus last year, Aerospace in total grew by roughly 10%. Power reduced by 5%. But again, if I exclude the buy and resell that now goes direct, Power organically grew roughly 2%. And General decreased by 5%, as we selectively choose kind of what markets we want to go after and we change out for supplying ourselves internally.

If I look at the segments being the Investment Cast Products, we had 8.3% increase in sales versus last year, going from roughly $538 million last year to $582 million this year. We saw operating income grow by 13%, going from $171 million last year to $193 million this year. And we saw margins expand from 31.8% last year to 33.2% this year.

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