Aerojet Rocketdyne Holdings Inc (AJRD) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the GenCorp first quarter 2002 conference. At this time, all phone participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions given at that time. If you should require assistance during the conference, just press zero, then star. And as a reminder, this call is being recorded.

I'd like to turn the conference over to the Chairman and CEO of GenCorp. Please go ahead.

Well, thank you and good morning. We appreciate you joining us this morning for a discussion of our first quarter 2002 earnings just released late yesterday.

With me this morning is GenCorp's Chief Operating Officer, Terry Hall, Yasmin Seyal, Senior Vice President of Finance and Acting Chief Financial Officer, Bob Anderson, Deputy General Counsel and Assistant Secretary, and Rosemary Younts, Senior Vice President of Communications. I'll open this morning's call with some prepared comments and we'll then take any questions that you may have. First of all, though, Rosemary will provide our forward-looking statement.

During this conference call, GenCorp's management team may make forward-looking statements, as encouraged by the Private Litigation Reform Act of 1995.

All statements in this conference call and in subsequent discussions, other than historical information, are forward-looking statements. These statements represent management's current judgment on expectations for future operations. A variety of factors listed in the "forward-looking statement" section of management's discussion and analysis in the company's Form 10-K filed with the SEC could cause business conditions and actual results to differ materially from those expected by the company or expressed in our forward-looking statements.

A replay of today's conference call will be available through April 5th. The call is also being audio broadcast on GenCorp's Web site.

Thank you, Rosemary.

At this time, let me provide more details on our first quarter. Clearly, income from our continuing operations highlighted the quarter. We reported segments operating income of $19 million, as compared to $9 million in the first quarter of 2001, results that reflect performance improvements in all of our segments. Revenues for the first quarter were $249 million, down from $353 million in the comparable 2001 quarter.

Excluding results from the Aerojet Electronic and Information Systems business, which, as you know, was sold this past October, and pension income revenues, like operating income, were also up in all segments.

Earnings per diluted share for the first quarter of 2002 were seven cents versus 33 cents in the first quarter of 2001. However, the quality of earnings during the first quarter period were improved. Earnings per share in the first quarter of 2001 included an $11 million foreign exchange gain related to the Draftex acquisition, a $7 million unusual item related to a tax refund, and income from the Aerojet/EIS, or Electronic Information Systems business.

Second quarter 2002 earnings per share included the expense of approximately $6 million related to the GDX Automotive accounting review. Our GDX automotive segment made significant improvements in performance. Operating profit increased to $6 million compared to an operating profit loss of $7 million in the first quarter of 2001. Operating margins increased to three percent versus a negative four percent for the same period last year. GDX Automotive revenues of $190 million were also up from $181 million, or about five percent over the first quarter of 2001.

North American revenues were up slightly during the quarter at $107 million versus $97 million in the first quarter of 2001. This increase was due to strong sales of GM light truck and sport utility vehicle platforms and increased production of the Ford Escape platform in North America. The first quarter of 2002 also reflects three months of sales from the Draftex acquisition versus two months of sales in the first quarter of fiscal year 2001.

I am encouraged by these GDX Automotive improvements. They are a good indication that the segment is beginning to realize the benefits of major cost savings and restructuring actions taken this past year. We expect improvement to continue throughout the year.

At Aerojet, net sales were $54 million in the first quarter of 2002, as compared to $170 million in the first quarter of 2001. The sale of the EIS business accounted for the decrease. If you exclude EIS results, revenues for Aerojet increased by $10 million year over year. Our work on the Titan IV, NASA's new COBRA booster engine, and the F-22 forward boom led to this increase in revenues.

Operating profit for Aerojet in the first quarter of 2002 was $16 million, as compared to $27 million in the first quarter of 2001, and again due to the sale of the EIS business and due to a decrease in pension income. Excluding these two items, operating profit at Aerojet increased $2 million year over year.

Continued flawless performance by our liquid engines during successful of both the Titan and Delta launch vehicles as well as the successful test of the Standard Missile 3 solid propellant divert and attitude control system for the U.S. Navy highlighted Aerojet's quarter. Aerojet also delivered de-orbit propulsion stage for the X-38 to NASA. This is the full-scale prototype for the international space station emergency crew vehicle.

While return to profitability remains a priority at Aerojet Fine Chemicals, revenues of $5 million for the segment were favorably improved over $2 million in the first quarter of 2001. Operating margins also improved, reflecting higher production volumes for additional products and cost savings achieved through restructuring actions last year. We expect continued improvement for this segment in every remaining quarter in 2002. Fine Chemicals ended the quarter with a contract backlog at $36 million versus $24 million for the same quarter of 2001.

In the area of real estate, , our newly appointed president of this business, is officially on board. And we still anticipate our agreement with federal and state agencies to be approved in April by the U.S. Federal District Court. As you know, this is the last remaining step to go through in the regulatory process as we evolve our strategy to realize the value from our significant property assets.

Looking ahead, we are maintaining the range of 90 cents to $1 as our earnings per share forecast for full year 2002, excluding any unusual items. We expect earnings per share for the second quarter of 2002 to be 22 cents. Revenues for the full year expected to be approximately $1.1 billion.

Now, that concludes my comments for today. At this time, I'll answer any questions you might have.

If you wish to ask a question, please press the one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue. And you can remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone, please pick up your handset before pressing the number.

We have a question from the line of with CJS Securities. Please go ahead.

Good morning.

Good morning.

You mentioned that the -- everything's on track for April. Is there any change in the date from April 8th for that hearing?

No. It's still scheduled for April 8th. We haven't heard any different. It's on the federal judge's docket right now.

So, what's the history of that type of hearing? Is there any reason why it wouldn't go through or wouldn't be approved?

Well, we don't expect it. The only history in this particular type instance is that we had filed with this particular judge, this particular court about a year ago to go ahead and allow us to have the carve out that we requested.

At that time, the EPA was opposing to us because we had not reached a final agreement with them. And the judge in essence told us all to go out and bring back something that was acceptable to both parties, both the EPA, California and U.S. and ourselves, and then indicated, although he didn't state it -- indicated that he would look favorably on it. So, we in essence have done what the court has asked us to do approximately a year ago.

OK. Just one more question on real estate. What is, say, the status of other parcels on your property at this point? Anything sort of in the queue that you could look up to over, say, the next 12 to 24 months?

From a sales standpoint?

Coming out of the super fund site in a similar way.

Well, our next step would be then to file -- work with the EPA and then file, as we have with this traunch, another traunch right after this. And then that's approximately how many acres?

Twenty six hundred.

About another 2,600 acres. So, we -- we're taking these in steps -- traunches. We go through the same process.

And now that you have Bill on board, have you thought a little bit harder about the strategy for realizing that value?

Well, that's exactly what he's putting together now in conjunction with the rest of the management team. Our strategy before bringing him on was in essence to look at various ways to monetize it, certainly, as I said before, try to team with developers and development over a long period of time so that we have an income stream. Could be selling off portions of it, although that's probably not the proper way to go with the tax position. So, he's in the process of putting that together, and we will be reviewing that with the board very quickly and be coming out with that strategy very soon.

OK. And just a quick pension question about the pension benefit. There was a note saying that the pension income was $5.9 million after tax. Can I assume that the tax rate on that was similar to the corporate rate?

Yes.

OK. Thank you.

Thank you.

Your next question is from with Capital. Please go ahead.

Hi. Good morning.

Morning.

Morning.

A few questions. First, in terms of -- can you break out the -- I guess the income from real estate in the first quarter is included in the aerospace and defense segment. Can you kindly break that out -- how much came from real estate?

It was about $1 million.

A million dollars? And just a clarification. The real estate income that you're getting right now, is that a recurring income stream?

Yeah. It's final income.

OK. And so, the run rate for this rental income, I presume, then, is $4 million a year?

That's pretty close. Yeah.

OK. OK.

Moving on to Fine Chemicals, I know in the prepared remarks you said, well, Fine Chemicals is sort of -- the efforts to bring it back to being a profitable enterprise. Can you sort of review through as to -- once again as to what the steps are going to be to ensure that happens? And also, give us some sense as to what you think normalized EBIT margins should be in this business if you wouldn't be able to meet the success in your efforts.

OK. The first thing obviously we took a lot of cost out of the Fine Chemicals business last year. What's currently happening this year is our largest product takes about five months to make. It has five chemical steps. And so, what you're going to see in this particular business is revenue growth and earnings growth, primarily weighted to the third and fourth quarters.

What it really needs to do in order to achieve what we think a normalized earnings margin is between 15 and 20 percent. We're suspecting this year it's going to be between five and 10 based upon volume.

So, what we really need to do is we need to get more volume in the plant. This year we're looking somewhere between $45 million and $51 million of volume versus about $38 million. So, we're making progress and we're on some products that have demand we've got to continue to fill. And we need about -- to get to a 15 percent margin depending on mix, we need about another $10 million in revenues. So, we need to get to about a $60 million revenue range, .

OK. Just -- when we look at '01 numbers -- I know you guys have taken costs out in terms of headcount reductions. And there were certain costs I presume to investing for the new product on track that you'd got. Last year we spent about $52 million in this division, I mean, operating cost, including cost of goods sold. I'm just sort of looking at $38 million in revenues, $14 million lost. If you can give me a sense for -- in terms of that sort of $52 million that you spent last year, how much was sort of -- what are the fixed overheads in this business versus sort of in highly variable costs?

Fixed overhead have been moved down about $10 million year over year. The variable costs depend on what the product mix is. One of the things that's occurring is to break even we need about $42 million in revenue. Once you get above that, the contribution margin's about 50 percent.

OK. In terms of -- you mentioned your largest product takes five months. What is that product?

It's a product called LO-59T. It's a product that goes in a neurology drug that's treatment for both migraines and epilepsy. We are currently getting certification or approval from the FDA to do it using a different process -- a hydrochemical process called simulated moving beds. When that happens, the time to manufacture it will go from five months to two weeks, but we don't expect that to happen until next year.

OK. Can you give us a sense of your customer's sort of breakdown in this business, how concentrated is your customer base?

We have in total about 14 customers. I think nine are pharmaceutical companies and the remainder are biotechnical companies. We have four major products this year that comprise about 85 percent of the revenues. The biggest product is the one we were just talking about, which is about 50 percent of the revenue.

OK. I'll get off, come back in the queue.

Thank you.

Our next question is from with Merrill Lynch. Please go ahead.

Hi. How are you?

Good. How are you, ?

Good. Congratulations. A very nice improvement in the quarter.

Thank you.

I have three question, first is GDX. If you exclude the impact of three months versus two months, what were organic sales at GDX?

They were about flat because the month we missed last year was December, and December's a bad month for auto. So, it's not a huge number.

OK. Thanks. And the second question is you -- the way you explained the impact of EIS on sales, could you do the same for EBIT, please? So, in other words, if you take out EIS impact, then EBIT was what versus the $16 million in '02?

I can probably figure it out. Hold on a second. It was about $13 million.

What was the contribution?

The contribution, though, some of that was pension.

OK. And that brings me to my final question. Could you give -- I think Yasmin said that the pension income pretax was at the 39 percent rate.

Yes.

And can I get the pension income pretax for the -- for last year's quarter?

I don't have that here, .

OK.

I don't have the answer right offhand.

All right. I'll get that off line then.

OK.

Thank you very much.

Sure.

We have a question from with Gabelli & Company. Please go ahead.

Good morning, gentlemen.

Good morning Jim.

Good quarter.

Thank you.

When I look at GDX, the turnaround's remarkable. It's there for a few million. What kind of normalized margin should I be looking at by the time you get to the -- I guess the fourth quarter into fiscal 2003 as you kind of get that -- you know, as you right size that business and you get that profitability moving again?

What we're looking at this year is roughly about five percent operating margin. And what you're going to see is lower than that in Q1 and Q3. So, this quarter it obviously was about three percent and higher than that in Q2 and Q4, with the biggest quarter traditionally being Q4.

Next year, we are pushing to get at least 150 basis point improvement in margin. We'd like to get 200. So, we need to continue to get more efficient in the plants. And so, we're trying to get to somewhere between 6.5 and seven next year, Jim.

OK. And can you do that without volume improvement in fiscal '03?

Yeah, we can.

OK. So, that's based upon flat volume then. OK. So, if there was incremental volume growth the margins could even be higher then?

Yeah. Right now, we're still having a hard time seeing what the next -- the last two quarters of the year. But the -- our customers are becoming a little more optimistic. So, volume will have an impact and could push the margins a little higher.

OK.

.

Right. Yeah. And that kind of gets me to the second question. Your $92 per share guidance for this year, what kind of economic assumptions have you built into that? Is there any economic growth in that? And would that just be more supply ...

It took ...

... if the economy strengthens?

In terms of auto, we've assumed basically a flat market.

OK.

In terms of defense, obviously defense spending is up. And we're looking for defense propulsion revenues to be up 30 percent or a little more this year.

OK. And then fine chemicals?

And Fine Chemicals, we're already saying we expect revenues to be somewhere between $45 million and $50 million. Last year they were $38 million.

OK. So, any economic strength we'll see that in the automotive numbers ...

Correct.

... which can accelerate the earnings there. Terrific. Great. Thank you, gentlemen.

You have a question from with Global Building. Please go ahead.

How you guys doing?

Good morning.

Good.

How are you?

Good morning. Got a question. The total earnings per share you're showing as seven cents. How much is it actually when you take out the pension number?

The pension number was between 13 and 14 cents.

So ...

And as a -- the expense of the audit, or re-audit, that we did when we did our restatement was about nine cents.

OK. And how much cash was actually produced by ongoing operations?

It's equivalent to depreciation plus earnings. We're actually up a little in cash, as you can see, in the quarter. But in terms of what we spent in the quarter, it was relatively flat.

Yeah. I saw the cash went up by $10 million or so, but then again short-term borrowings also went up by $9 million.

Right. Right.

So, it kind of washes right there, doesn't it?

Yeah. We expect for Q1 and Q2 to be cash negative this year.

Cash negative?

And that's driven by working capital expense in the defense business.

OK. And what happened to the -- I believe in the 10-Q from last -- at year end you had some capital deadlines and stuff that you were trying to raise some funds on for liquidity and those types of issues. What's going on with that?

It's still along the same wave. What we stated in the Q essentially we have the term loan seat from the banks and we have an additional funding available to us.

All right. So, it's already been lined up, the funding and everything?

Well, what we said is we have enough funding to make it through the year. We're looking at ways to increase liquidity, and we'll probably do something sometime in the next quarter.

OK. All right. Well, I do appreciate it. Thank you.

You have a question from Robert J. Smith. Please go ahead.

Yes. I'm with the Center For Performance Investing. Good morning.

Good morning.

Good morning.

I have two questions. The first centers on Aerojet's role in the missile defense system. Can you give me some background? And if this is actually succeeds and is deployed, is there any way to get one's arms around what the potential market would be?

Well, our performance in that is we have the attitude -- direction and attitude control propulsion system for one of the major defense systems in that arena. During the testing, we also have the test vehicle -- the minuteman that they're using for a target vehicle. We also had a propulsion system on that. And, of course, that will go away in the long range -- long term.

It's very difficult to say what the total expectations for that would be. As you know, this current administration is pushing very hard for that program to go into a full scale development and then final production. There's been several numbers that have been thrown around about that. I think it would be wrong to speculate on what that is right now, but it appears to be a very high requirement and priority with the administration.

What are the numbers that have been thrown around?

Here's what the government is saying what they have in their budget plans for national missile defense. They're going to spend about $4.8 million -- $4.8 billion this year. That's going to $7 billion per year starting in '03, at least through '06.

What we're doing, as Bob told you, is we're on primarily the guidance system and we're also using some of our cooling technology to actually keep the heat off the glass that's in front of the infrared sensor for the missile that goes through the atmosphere. What we expect -- or what it looks like our opportunity there is is over about an eight-year period of about $750 million in terms of what may be available to us once they go to production. And right now, they're scheduled for low rate production in about a year.

OK.

And the reason we're fairly competent is we have the only attitude control system that's worked on the test. We're the only test where it actually hit, the target vehicle have all been with what we call our solid system.

And what is the current contract value?

The current contract value is just R&D. And I think it's probably between $30 million and $50 million.

OK. Thank you very much. And my second question involves real estate. The property that was sold prior year, how does that -- how is that measured, sort of speaking, against what remains as far as its value?

It's value -- we viewed it as one of the least valuable parcels that we had, in part because it's away from the highway. It doesn't have access, it doesn't have improvements, and it's not entitled for anything right now other than agricultural. The property that we're currently calling the carve out, the 2,600 acres that there's the court hearing on April 8th, part of that property, not quite half, is entitled for 3.6 million square feet of office and light industrial. It's also on the highway. So, we view it has a much higher value.

Can we kind of have a guesstimate as to the multiplier of that?

I don't have a guesstimate. I mean, we've looked at comparables on much smaller parcels that have sold within the last 18 months. And the comparables have been between $6 and $10 a square foot in sales value.

Thanks very much. Good luck.

Thanks.

Your next question from with Mutual Asset Management. Please go ahead.

Thank you. Good morning.

Good morning.

In the Aerojet backlog you noted in the release that it reflects a decrease due to a commercial customer not being able to meet their funding for their program. How much of the backlog of the $594 million backlog at this date represents commercial customers as opposed to governmental customers?

Almost none now. That was ...

OK.

That was almost all of it.

That tells you that. You said -- in response to an earlier question on this -- the next carve out of the real estate, another 2,600 acres, that you're inclined not to try to sell the property but to work with developers. Did that statement apply to this current carve out that you're going to court over in April?

Yeah. Here's our issue so you understand it. We have -- we've owned the property since 1956.

Right.

We have no tax basis in the property. And so, we need tax efficient structures in order to optimize the values of share of those. And that's what's driving -- that's what we're trying to figure out what we can do and how do we do that.

Which applies for both the current carve out and future carve out.

And those strategies here being to maximize value over time.

Over time. Yeah. So, if you just did an outright sale you're going to pay a significant tax bill right away.

Right. Yes.

Or the value being in an outright sale, too.

Yeah. Whereas obviously if you put it into a development partnership you create more value over time.

That's what we're looking at now.

OK. Great. Thanks.

You have a question from James Crawford with Lucas Partners. Please go ahead.

Hi, guys.

Hi, Jim.

Good morning.

Listen, I noticed that the potential funding that you're going to be doing in the second quarter you didn't put an amount on that. I was trying to get a fix on that.

We still trying -- we're still trying to understand which market we're going to go to and how much we're going to do. I don't really have a -- we haven't made a decision yet.

No range or nothing like that?

No.

OK. Thanks.

We have a follow-up from the line of with Capital. Please go ahead.

Hi, guys.

Hi, .

A couple more questions. First one, the -- you said corporate expenses were $9 million and you had $6 million of this sort of extraordinary expense. I know you've cut costs, headcount at the corporate offices. So, is the right number to use about $3 million a quarter for corporate expenses going back -- or going forward, or are there going to be changes there?

No. That's about the right number.

OK. And the expense of $2 million, which related to the next pharma acquisition back of AFC, where does is that reflected?

It's in the unusual item ...

OK.

... to the ...

OK. Just in terms of the sort of funding that you had indicated, I know you have working capital requirements because of action item programs. But can you a bit about what -- sort of what you're thinking on the funding options is right now and what the timeline's likely to be?

Well, obviously we're looking at public markets as opposed to the bank markets. So, it'll be some type of -- it'll be a different debt market than we've dealt with in the near past. When we'll launch and what we'll do, as I said, is still under ...

We're still evaluating options.

OK. And finally, in terms of pension income, your estimate for sort of contribution from pension income for the year, do you have an estimate of that?

Yeah. We told them $39 million pretax.

Panch OK. Thank you very much.

Thank you.

And we have a follow-up from with CJS Securities. Please go ahead.

Yes. I have to follow-up on the real estate. Terry, you put out some numbers on what that land could be worth sort of minimally. Any thought to take some small portion of that and utilize it in just sort of a quick way to generate some shareholder value, say, to buy back some shares or even to pay off some of the debt?

Yeah. They've looked at it. Right now we think -- whenever we're looking at real estate sales, it's only something we're going to do if it enhances the value of the rest of the real estate that we own because we have so much there.

One of the things that we've been talking about or in discussions with the state of California for some time is putting in a light rail station, for example, right on the front of our property. We would sell them the property because it would increase the value of the rest of the property. Those are kind of our guidelines on what we would do. Obviously, if the company needed funding quickly, they could use the real estate as a source of that. But given the tax structure in any large amount ...

And the overall goal of enhancing value over time.

... it doesn't -- it's not our first choice.

But does it preclude any small portion you might use in a near term way?

No, it doesn't.

OK. Thanks.

And if there are any additional questions, please press the one at this time. We have a question from the line of with Capital. Please go ahead.

I promise this is the last question. On the real estate -- our inquiries -- when we talk to the people in that area, one of the things that sort of people point out is that in the last few years there have been sort of a lot of groups that have organized themselves with an intention of ensuring normal commercialization in that part of the world, but simply because obviously all of us who stay this side of the world it's pretty crowded. And I'm just sort of -- even if you get through the carve out approvals and the entitlements, have you been speaking with these environmental groups or general community groups out there? Any update on that end?

Well, we have. But you have to understand our -- there's two communities around our properties. One is a community called Rancho Cordova, which is in the process of trying to incorporate and become a city. And, as you know, in California if you want to incorporate you have to show that you're not negatively impacting the county's, in this case, its revenue base, which means if Rancho Cordova does successfully incorporate they will be pro-growth because that's going to -- how they're going to get additional tax base.

In terms of our other neighbors, it's a city called Folsom. We are not in the city of Folsom. We are in the county of Sacramento. And Folsom has had a lot of growth and there are certain factions there that don't want to grow more. There are other factions that want to continue to grow. But it's not a -- we're not in their jurisdiction at the moment. And a lot of, again, interest has been in are we going to stay in the county or is part of our property going to go to Folsom. We've already agreed to put the western -- a western portion of our property into Rancho Cordova. And we expect that our interest in development and theirs in growing the tax base will be aligned for some time on that piece of the property.

Thank you.

You're welcome.

And at this time, there are no further questions.

OK. Thank you very much for joining us. We'll look forward to talking to you at the end of our second quarter. Good day.

And this conference will be available for replay starting today at 12:00 p.m. and lasting until April 5th at midnight. You can access the AT&T Executive Playback Service by dialing 800-475-6701 and entering the access code of 633060. International participants, please dial 320-365-3844 with the same access code of 633060. That does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference Service.