Precision Castparts' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Precision Castparts (PCP)

Q2 2012 Earnings Call

October 27, 2011 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

Eric Hugel - Stephens Inc., Research Division

Kenneth Herbert - Wedbush Securities Inc., Research Division

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

Noah Poponak - Goldman Sachs Group Inc., Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

Elizabeth Grenfell - BofA Merrill Lynch, Research Division

Richard Tobie Safran - Buckingham Research Group, Inc.

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

Robert Spingarn - Crédit Suisse AG, Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division

Jason M. Gursky - Citigroup Inc, Research Division

Heidi R. Wood - Morgan Stanley, Research Division

Carter Copeland - Barclays Capital, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

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

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

David E. Strauss - UBS Investment Bank, Research Division

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

Presentation

Operator

Good morning, and welcome to the Precision Castparts Webcast and Conference Call to discuss its second 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, 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 the forward-looking statement and you need to take consideration when you're analyzing the following information.

I think in general, Q2 delivered a strong performance but I think more importantly than that it certainly establishes a new baseline for us to move forward with. Certainly when I look at the numbers of significant drivers we have out there in front of us, it certainly lays a lot of groundwork for a lot for us to do. Having said that, we'll get a lot more of this detail as I go through the segments, but in total for the company, we saw sales growth of the 18.7%, going from $1.5 billion last year to just under $1.8 billion this year. We saw operating growth of 20.5% going from $363 million last year to roughly $437 million this year. And we saw operating margins expand from 24% last year to 24.4% this year and this also includes a dilutive effect from the recent acquisitions across a number of our businesses that occurred in the quarter. And all this generated an EPS of $2.03 versus last year of $1.70.

If I look at the significant drivers for the company, on sales, when comparing to last year, we had a number of positive drivers. We kind of put -- begin to put on an apples-to-apples comparison in the quarter versus last year, we had incremental material pass-through and selling price of roughly $63 million. From there, certainly as you'd expect, we saw a very solid Aerospace growth of 18% versus last year. We're seeing this on a number of fronts. We're seeing it from the standpoint of we're supporting a current build schedules. We certainly are seeing some of the early announced build rate increases in our numbers. And then compared to last year, in our Castings and Forging segment, we are seeing steady 787 activity and our Fasteners were still lagging. We saw a strong aftermarket demand and we also a very strong external alloy sales.

In Fasteners, we saw improved aerospace fasteners growth of 9% versus last year. But again this is off the low point, so if I go back to what was the lowest point in our fasteners, it was Q2 of last year. Having said that, at least we're moving in the right direction in that standpoint. And again, we'll get into a lot more of these details as we go through Fasteners.

We saw strong IGT demand, roughly 21% versus last year and we continue to see industrial growth of 4% growth from last year. And we also saw the beginning effect from our recent acquisitions.

If I look sequentially, we continue to see Aerospace growth for the company of roughly 3% versus Q1 and IGT continue to be strong, contributing 5% growth versus Q1. As with the year-on-year, we also saw a contribution in Q1 from the new acquisitions, this is where they basically all occurred.

Looking at EBIT for the company, we saw solid leverage from the incremental volume. We talk about this at some of the -- we discuss with our investment community, we discuss it day in and day out with our operations, so staying squarely focused on that incremental drop-through for us is key. This -- you'll see this across all of our segments. We will get into kind of what the effect was in the segments. But along with the absorption benefit we're getting, we also continue to see improvements across our operations, in productivity and yield. And one of the areas that we work tirelessly on is continue to hold on to that revert levels. And I think the Caledonia has been huge for us as we have been able to find new ways of getting revert levels that we weren't able to get in the past, so we're in a growing market to be able to hold on to our revert levels, for us, has been significant.

Pressure on margins in the other direction is obviously the dilution effect of the higher material pass-through, just a math formula, getting sales with no associated profit. And even though a positive on operating income, certainly the addition of the new acquisitions were dilutive compared to our base business. Basically, the case of all the -- all of the businesses we bought over the years, we establish a new baseline and we build off of that, and I think these businesses kind of fit in that same trend right now. And again, all this yielded a record EPS but we have a lot more to do.

If I look at the sales by segment, as you'd expect, we saw Aerospace go from 57% last year to 61% this year. Power was basically flat at 22 versus 21 this year. And General Industrial as a percent of total went from 21% to 18%.

If I move into the segments, starting with Investment Cast. We saw sales growth of just under 12% going from roughly $512 million last year to $573 million this year. We saw operating income increase by 17% going from $162.5 million last year to roughly $190 million this year. We saw margins continue to expand going from 31.7% last year to 33.1% this year.

If I look at the key drivers inside Investment Cast Products. On sales, key catalyst certainly was an overall 18% increase on aerospace sales for the segment. Again, we've talked about some of these. We're seeing very stable base rates. If I go back to where we were a year ago, the restocking that was continuing to go on, that's now gone. In Investment Cast compared to last year, we do have a modest 787 increase and I think we are supporting kind of the current rates in that 787.

We a saw strong aftermarket sales growth of roughly 24% and we also had very strong external alloy sales in this business of roughly 30%.

Moving on to Aerospace. We saw good IGT growth compared to last year of 7%. And again, putting everything on an apples-to-apples comparison, we saw $9 million more of material pass-through.

If I look at EBIT, we continue to see very strong leverage on incremental volumes and we've been able to -- in this side of the business for us certainly productivity is key, we've been able to kind of attack that productivity we've -- I think we've been hiring in a controlled manner. We've been able to benefit out of that. This is all -- we are getting incremental margins, kind of in that sweet spot we've talked about, of greater than 45%. And we did overcome the dilutive effects of the material pass-through and here would have been about 0.5 percentage point higher without the material pass-through on the top.

If I look forward for Investment Cast, I think we have a number of rate increases over the next 2 years on our base programs that will drive upside. And even though we do not have a specific build schedule announced yet in the 787, any increase will be incremental. And if we take a step forward and go from where we are today in this -- in Investment Cast, at about 2, to where the angle is about 10 a month, this is just a significant, significant catalyst for us in this business. And you're going to hear that, as you can well imagine through all of our basic businesses.

If I look at IGT over the next year, I think we have upside there. Even though at this point in time, there's not any significant changes in the number of engines that the OEMs are manufacturing. For us, we are seeing a mix shift, mix shift, as in the technology, more advanced parts, more complex parts and that all yields us a higher dollar content per engine. So if I look at moving into the next calendar year, we certainly are seeing a positive effect from that particular mix shift. And spares hasn't seen any significant uptick yet but I do think there is a potential as the engines are brought down for overhaul and repair.

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