Aerojet Rocketdyne Holdings Inc (AJRD) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the GenCorp, Robert Wolfe conference. At this time, all lines are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. If you need assistance during the conference please press zero followed by star. As a reminder, today's call is being recorded. I would now like to turn the conference over to our host -- Mr. Robert Wolfe. Please go ahead, sir.

Okay, thank-you. And good afternoon. We appreciate you joining us this afternoon for the discussion of our second quarter 2002 earnings, which were released this morning. With me today is GenCorp's Chief Operating Officer and soon to be C.E.O. and President, Terry Hall; Yasmin Seyal, Senior Vice President of Finance and Chief Financial Officer; Linda Cutler, Vice President of Corporate Communications; and Margaret Hastings Assistant General Counsel.

We'll open this afternoon's call with some prepared comments and then we'll take any questions that you may have. Our first, I want Linda to provide our forward-looking statement.

Thank you, Bob. 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 and elsewhere in our most recent form 10-K and other filings 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.

Also, you all should be aware that today's -- I mean, today's conference call, a replay will be available through July 3, 2002. And the call is also being audio broadcast on GenCorp's website at www.gencorp.com.

Okay, thanks, Linda. Overall, I'm very pleased with the company's results this quarter, especially the ongoing operating margin improvements at GDX Automotive and Aerojet Fine Chemicals and the backlog and contract strength at Aerojet.

We reported quarterly operating profit of $21 million, as compared to 14 million in the year ago quarter. Earnings per diluted share for the quarter were 23 cents, excluding unusual expenses. These expenses included a pretax $6 million expense related to a purchase price adjustment of the electronics and information systems business sold to Northrup Grummand in October of 2001, and the write-off of bank fees associated with termination of a term loan. With these expenses, EPS was 14 cents, compared to 12 cents for the preceding year.

Now, looking more specifically at each of our segments. First of all, at our GDX Automotive segment operating profit increased by 27% over the same period last year to $14 million. Operating margins increased to 6.7% from 4.8% reflecting improved plant productivity driven by costs and personnel reductions. Net sales decreased slightly to $209 million reflecting lower volumes in the segment's North American business. However, the automotive market has begun to show signs of improvement, particularly in the North American segment supplied by GDX Automotive.

Turning now to Aerojet -- excluding the EIS results, quarterly net sales for aerospace and defense business increased $18 million, primarily due to the delivery of a NASA X-38 D-Orbit propulsion stage. Operating margins for Aerojet decreased as compared to first quarter driven primarily by profitability associated with a mix of contracts. However, contract wins still remain strong. Awards projected to total $116 million were secured by Aerojet during the quarter. These include two awards from Raytheon, a $71 million contract for 30 divert and attitude-control systems and a $12 million contract related to a solid divert added to control system. Also during the quarter, Boeing exercised an option to produce six additional Delta engine systems worth approximately $23 million, and we received a new contract valued at $10 million from the Air Force Propulsion Lab to develop technologies for an advanced air lightweight air chamber and nozzle. Overall Aerojet's contract and funded backlog, as of May 31, 2002, totaled $550 million and $350 million respectively.

Aerojet Fine Chemicals also had a good quarter making significant progress towards its goal of profitability. Revenues increased to $10 million compared to $3 million in the second quarter of 2001. AFC reported a loss of $1 million, compared to a loss of $5 million in the second quarter of 2001. The progress in this segment is due, primarily, to an increase in productivity and enhanced cost controls. Backlog, as of May 31, 2002, totaled $57 million representing an increase of $21 million over the first quarter of this year. We are looking forward to continuing improvement in this segment and are forecasting that Aerojet Fine Chemicals will be profitable for the remainder of fiscal year 2002.

With respect to our overall outlook, we are forecasting third-quarter earnings per share in the range of 14 to 16 cents, excluding any unusual items, we expect total fiscal year 2002 earnings per share to be in the 90 cent to $1 range.

Now, finally, I'd like to spend just a few more moments discussing other important developments that I view as instrumental to achieving our strategic goals. First, we successfully completed the placement of $150 million of convertible subordinated notes. We also announced the filing of a universal shelf -- the goal of which is to give the company more flexibility and to enable the company to react quickly. This is important as we continue to pursue our stated goal of acquisitions in the defense industry.

With regard to real estate, as you know, we received final approval from the U.S. District Court to remove 2600 acres of our prime Sacramento land from the superfund designation. Under Bill Perdy's leadership, we are in the process of developing a strategic plan to lay out the steps necessary to best optimize the value of this asset. As previously stated, our goal is to enhance the long-term value generating income and cash. We intend to more fully articulate our real estate plan in the early fall.

In the environmental area we settled outstanding claims and reached a favorable, comprehensive agreement to restore ground water to our Baldwin Park site in southern California. This is significant because it puts a system in place to provide contaminant plume control and safe drinking water to the residents and settles pending lawsuits while quantifying and limiting our liability for this site.

We also announced strategic personnel appointments and promotions. As mentioned previously, Bill Purdy, a senior real estate professional, has joined us to spearhead our real estate efforts.

Linda Cutler has joined us as Vice President of Corporate Communications. She brings a wealth of communications and investor relations expertise and will be instrumental in the message development and outreach to our stakeholders.

Michael Bryant, who currently runs our GDX Automotive European operation, will assume the role as President of GDX Automotive. Michael brings the background and expertise to lead GDX's automotive ongoing growth and performance improvement.

Yasmin Seyal, whom you all know, has been promoted to Chief Financial Officer. She brings years of experience of background with GenCorp and was responsible for navigating our company through some tough times under intense financial scrutiny.

And, finally, we have announced that Terry Hall will assume my role as President and C.E.O., effective July the first. It is under Terry's leadership that GenCorp will refine and implement its next generation of strategies and as Chairman, I am thrilled to have him at the helm.

These leaders, combined with those currently in place at the business units and at headquarters are an extremely competent team. They have my and the Board's full confidence. Now, that concludes my comments. At this time I'll turn it back to the operator, Art, for questions.

Very good. Ladies and gentlemen, if you have a question at this time, please press the 1 on your phone. You'll hear a tone indicating that you've been placed in queue and, if you're on a speaker phone, please lift the handset before pressing the numbers.

We do have a question from the line of Harriett Baldwin with Deutsche Bank. Please go ahead.

Good afternoon, everybody.

Good afternoon.

A question for you -- obviously, the quarter had some good progress made in it. Any change in your view or increasing your confidence of getting to be free-cash positive in 2003 given the performance in the May quarter?

I think, Harriet, this is Terry. I think that right now we don't think we'll be cash-positive for the year, and it is primarily driven by the Aerojet business. Again, we're uncertain exactly what it's going to cost us on Atlas-5. We had an anomaly in the launch, which means we'll have to have an additional test. Until we know the answer to what the fix is for that problem we can't really say we'll be cash positive or better than what we've said in the past which is that we'd be cash negative for the year.

For 2002, right, but...?

Yes.

Has anything changed in 2003 or is that still far enough in the future that even with the defense contracts piling up that the visibility is about the same as it was a quarter ago?

I would say that in 2003 we're fairly certain we'll be cash-positive. Again, the one caveat is we still haven't totally reached an understanding to the fix of Atlas-5 and we won't for a couple of weeks.

Great.

Certainly with the increased operating profits that we're seeing with the GDX business, we would hope that the company, as a whole, is cash-positive.

And, you know, thinking about Auto, obviously, margin, you are starting to make some pretty good improvements here. Is getting the margin going further is -- is volume going to help as well as the process improvement? Is there kind of a handoff at some point from the cost side to the volume side?

Well, we always get benefits in the second and fourth quarters from volumes. I think going forward next year we're forecasting volumes as flat. And we're certainly not assuming a robust market next year. So market could change our forecast but, right now, we're seeing flat to slightly down.

And your efforts to rebuild some of your business, particularly North America, is there a platform win rate that starts to kick in at some point? Or is that still pretty far in the future?

It's a little far in the future. The problem with platform wins as you know Harriett, is you get the benefit about three to four years after you win the platform.

Always true. Okay. I'll let somebody else pepper you. Thanks.

Thank you.

Our next question comes from the line of Michael Rosler with CJS Securities. Go ahead.

Good afternoon.

Good afternoon.

Looking at the defense segment and the margins there if you ex-out pension income, maybe just a little more color on what were some of the issues that depress the margins in that segment in this quarter?

I think one of them, obviously, is our mix. We're going from last year, we had 30% R&D, roughly. To this year we have 50% government-sponsored R&D. That results in lower margins. The second thing, obviously, is we're spending some money on Atlas-5 and resolving that problem, but the biggest thing seems to be the fact that we're doing more R&D and less high-rate production as a mix.

And then, Mike, it's also affected by -- even though we do see increased sales in this quarter the sales didn't carry with them the higher margin product which, first quarter, the margins were a little bit higher because there were more award fees associated and more profit with the mix of sales at that point in time. But, overall, over the year we should see a return to the increased margin.

So that should reverse out itself in the next quarter?

We should -- we hope to see better.

Yeah, generally it reverses out Mike, in Q4. Well, we'll also know pretty well where we are on Atlas-5 then. Since Terry said we should have the fix defined in a week or so and a requal test end of August, early September.

Okay. And, in terms of the new awards that you got in the quarter, is -- were those all R&D? You said that Boeing was an add-on contract. Is any of that furthered in the life cycle more production?

Most of I think what we got in the quarter that we talked about was, really, more -- it's more development than R&D. We're starting to get contracts, as you saw, for the DAX system which is the national missile defense product that we do.

Right.

And that was, really, for a number of units like 25 or 30 units.

And we also saw the six more with Boeing, which is less R&D there.

Right. So what we got I wouldn't qualify really as R&D. National missile defense is a little unusual in that we seem to be going from R&D to almost what I would call almost high-rate production without any development step in between.

And the sort of time frame where those contracts start to fall in, where is that?

I think that the DAX contract was through 2005.

March 2005.

Okay. And just sort of, real quick on real estate has there been any change or sort of new interest that's been brought to you guys since the carveout and how that might be factoring in to the development of your real estate strategy?

I think, since the carve out the one thing that's happened is that the appeal period has passed. So we're now certain that the carve out is final. We still are having numerous conversations with lots of different, interested parties, but our plan right now is we talk to our board in a few weeks and go through a strategy session and then, once we've talked to them, I think we'll be able to shed a little more light on what we're going to do on real estate.

Ok. And just one more on the acquisition strategy. With this shelf, is there any restrictions on size in terms of how this might impact your coverage ratios depending on what you do in terms of acquisitions?

No. The shelf that we filed allows us to do an issue of $300 million. At this point we've just filed the shelf and I'll just say depending on what we do, there will be different restrictions on the type of security issue, the type of debt issue, etc.

Per individual deal. It will be by deal.

Yeah, there's nothing in the shelf itself that precludes you from doing anything but, right now, we have the ability to go the entire gamut, though, we'd anticipate using, primarily, it as a debt shelf but we can issue equity off the shelf if we should desire to.

But. you anticipate it to be debt?

Right now, yeah, I mean, it all depends on what we acquire and how big it is, and then what the numbers look like in terms of accretion.

All right. Thanks.

Thank you.

And our next question comes from the line of Oozie Timmerman from JMG Capital. Please go ahead.

The revenues for last year at this time, it's $410 million. Can you tell me what it was without including EIS?

EIS, for the year, was about $300 -- $320 million to $360 million, some number like that. Aerojet itself, once you take out EIS, is up less than 5% year over year.

So it's up 5%, so -- okay. The resolution, purchase dispute, cash payment of $6 million, was that made this quarter or is that going to be later?

The cash payment will be later.

Later in the year, next year, tabled in two installments.

Okay. And is the -- regarding the shelf, do you guys have any preference as to whether you were going to do debt or equity? At this point, I'm not sure what your ideal capital structure is.

Our preference would be debt at this point, however, if we pulled down the shelf, however, we do have the flexibility of doing some equity, should we choose to do so. And, again, how much you use of equity and/or debt will depend on the size of acquisitions that we do.

Right. Okay, thank you.

And our next question comes from the line of Jay Glassman with McMahon Securities. Please go ahead.

Yes, good afternoon.

Good afternoon.

If you could just give me a general idea as to the current level of bank debt outstanding and the availability under your bank line?

Currently have --

As of the quarter we had total debt of about $270 million and our total revolver available to us is $137 million. And that kind of fluctuates depending on different working capital needs. But, it can vary between $80 to $100 million of availability there.

So 137 now but it will vary in the 80 to 100 million range?

Depending on what the working capital requirements are day-to-day.

I understand. And one other question related to the shelf. And I know it's way early because you don't even know what you are buying or when you are buying it. But you folks just issued a convertible security. What would the likelihood be if you did do debt that it would likely be convertible?

I can't answer the question because, again, it will be driven by more of what's the optimal structure given the size of the acquisitions that we do.

I understand. Thank you.

And our next question comes from Faruk Faruki with Merrill Lynch. Please go ahead.

Good afternoon.

Hi Faruk.

How are you?

Okay.

I just want to talk for a minute about your acquisition strategy here. I assume you are you looking primarily at propulsion or am I assuming too much here?

I would put it this way. We're looking primarily at defense. Our first -- our first priority would be propulsion. Having said that, if the economics don't work out, then we would look at more defense subsystem work, either related to propulsion or to some satellite work that we've done in the past, or structures that we currently do, for example, for Boeing. But our -- our preference would be propulsion.

Okay. And, just to follow up, what sort of valuations are you seeing out there? I assume they're much higher now than when you were, perhaps, looking at these about a year-and-a-half to two years ago.

The defense multiples are much higher. What we're looking at or targeting is something in the range of nine times even.

Okay. Alright, thank-you.

Sure.

And our next question comes from the line of Jim Fong with Gabelli & company. Go ahead.

Hi, good afternoon or good morning I guess.

Hi, Jim

Good afternoon.

I guess most of my questions are answered. But just picking up on the acquisitions, you say is it nine times EBIT that that's what? Nine times EBIT or EBITDA?

EBIT.

EBIT, okay. That's the kind of multiple where you kind of like to park companies at?

Yes, or less. Actually, less is better.

Well, I guess the question is -- I mean, how likely is that with TRW's the business selling for 13 times EBITDA?

What we're seeing is nine to 15 to 16 times so, I mean, it's not without its challenges. We're also seeing some properties, which are smaller pieces of bigger companies at the lower end of the multiple because there just aren't that many people who are acquiring, particularly, in the propulsion business.

Ok.

And whether we can do one successfully, only time will tell, but that's our goal, Jim.

Okay, so within propulsions, those could be workable parameters?

Yeah.

I guess, outside that it becomes much harder?

Yes.

Okay. Just a quick question on the Automotive. Are you seeing built rates moving up in the third quarter, as well as fourth? There's been some, you know, increase by the OEM's to --

Yeah. We're seeing some build rate up. Though as you probably know, the third quarter always has plant shutdowns, both by the OEM's and by their suppliers, so I don't think -- we'll see a third quarter that's strong for third quarter reference but, certainly, won't approach anything close to the second quarter and, really, you should see most of the benefit in the fourth quarter.

Right. I mean -- right. Year-over-year, you see an increase? Although, sequentially you won't because of the seasonality of the third quarter?

Right.

And you're assuming flat production in '03 in Automobile?

That's our current forecast.

Okay. And then, just lastly, were there any real estate sales, revenues and profits in the Aerojet business in this quarter?

No. The only revenues were the ongoing rental revenues that we get from leaseholds.

Okay. And how much -- and what is that?

Generally it runs about a million and a half a quarter.

Okay. Great , okay, thank-you very much.

Okay.

And our next question comes from the line of Todd Rothner with Blackrock. Please go ahead.

Hi. I was just wondering if your Auto business mix between the OEM's has changed significantly and what it was for the most recent quarter?

I don't have the most recent quarter mix. Typically, what we've been seeing is G.M. has been relatively strong, primarily driven by the GMT-800 program which is Tahoe, Yukon, Suburban and their Silverado pickup trucks. What we're seeing is, we're seeing some improvement in the Ford Explorer, sales from Ford. We're seeing some pickup in that. And we're also seeing relatively strong but stable numbers in the Ford Escape, which is their smaller S.U.V. Other than that, we're not, you know, I can't say that there's any major swing in market share or in revenue share among our OEM's in North America.

Okay, great. And then the light-rail station. I've been trying to find out about this a little bit more. Is that in development or has that already been -- being worked on?

It, it hasn't, they haven't started building it right now. We've had discussions with the State. They want to purchase some of our property. They were just recently informed that they'd have to go through a study to get the federal funds so it's going to pay for it. And one of the things we're currently trying to figure out is how long does that study take? If it takes through the year then that sale will slip to Q1. If it gets done prior to that then the sale will show up in the year.

Great, thank you.

And as a reminder, if there are any additional questions, please press the 1 at this time. Once again, if there are any further questions please take this final opportunity to queue up by pressing the 1. And we have a question from the line of Eric Stevenson with Mellius Capital Management. Please go ahead.

Good afternoon, everyone. Solid quarter.

Thank-you.

Thank- you

Just a couple of housekeeping questions. Can you share with us what the change in working capital was for the quarter?

It's primarily Atlas-5.

Okay. And what was the amount?

The total debt went up by about $24 million.

$24 million. Great. And the cash flow from operating activities? Approximately?

Is -- I don't have that number here with me, Eric.

Oh, okay. And the pension income for the quarter was around $6 million. What was it for the comp period a year ago?

That is a little hard to show because it depends, again, on how much you allocate to the EIS since most of the pension income comes through defense. I would say it's down. Pension income is down this year. But on a comparable basis it is probably down 10% to 15%.

Okay. Great. All right. Thanks a lot.

And our next question comes from the line of Nees Patel with Global Building, please go ahead.

Hi, how are you guys today?

Good. How are you?

Doing well. Just a follow-up on that last question, the pension income. How much are you expecting in your EPS number for '02?

We're expecting the same number every quarter.

Okay. And that is I think, was it 10 to 12 cents?

Yeah.

Okay. Another question -- regarding the sales decline at GDX,, was it related to particular platforms? Because, from what I've seen in the data, production has actually increased over '01, so I'm guessing it's related to specific platforms that you guys support.

Yeah, it is specifically on certain platforms and it is a little on each platform. One of the, probably the bigger drivers is probably the Ford Ranger. To, the Ford Ranger is down a little bit.

The Ford Ranger is down in North America, also the Volkswagen Beetle.

And the Jetta is down a little bit.

Is down year-over-year. And it's primarily those along with a Saturn program that's winding down.

So it's across the board, generally volume.

Okay. And regarding the convertible note offering, is it nondilutive?

At, for this quarter, yes.

Okay. All right. Thank you.

And we have a follow-up from the line of Michael Rosler with CJS Securities. Please go ahead.

If I could tie in two things here. How does the pension overfunded status tie into any potential acquisitions in terms of maybe offsetting underfunded status and how that might play into the multiples you might pay?

That's a good question. We are, obviously, looking for ways to utilize our overfunded pension. It's hard to find a lot of -- or it was hard to find a lot of defense companies that were underfunded. There are some now, just given the drop in the market and, so, it is something that we're hoping to use as a synergy in selected acquisitions, but they aren't easy to find, again.

And when you say synergy, exactly how would you be able to use it?

If they're in a deficit situation where they have to contribute, if we acquire them, we're still in a surplus and, so, what happens is you convert the surplus into additional earnings and additional cash flow because you -- they will no longer have to do a pension contribution.

Okay. Thanks.

You're welcome.

And, speakers, there are no further questions. Please go ahead with any closing remarks.

Okay. Well, thank you very much for joining us today and thank you for your continued support and interest in GenCorp. Have a good day.

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