Aerojet Rocketdyne Holdings Inc (AJRD) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to GenCorp fourth quarter earnings conference call. At this time, all participant lines are in the listen-only mode. Later, there will be an opportunity for questions, instructions will be given at that time. If you should require assistance from an operator during the call, please press zero, then star. As a reminder, the call is being recorded. I would now like to turn the conference over to Vice President, Corporate Communications, Linda Cutler. Please go ahead.

Thank you, operator and good morning. 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 our fourth quarter and full year 2002 earnings release as well as management discussion analysis and elsewhere and 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, please note that a telephonic replay of today's conference call will be available starting today at 11:30 a.m., Pacific Standard Time for the next week through Friday, January 31st. This call is also being audio broadcast and will be available on GenCorp's website at www.gencorp.com. Now, I would like to turn the call over to Terry Hall, President and CEO.

Thank you, Linda and good morning. Today what I am planning on doing is discussing our fiscal year '02 results, talking about our fiscal '03 forecast or guidance, and discussing our '03 strategic calls and then I will take questions at the end. In fiscal of 2002, we had sales of $1.1b and net income of $30m or $0.69 per diluted share. That compares to fiscal '02 results of sales of $1.5b, net income of $128m or $3 per share. Our '02 guidance was $0.90 to a $1 and EPS excluding unusual and restructuring charges consistent with that guidance, we had $0.90 in earnings per share and $17m of unusual and restructuring charges. So, we were at the low end of that range.

The focus of our 2002 plan was to improve operating income when compared to the 2001 performance. In 2001, we had a number of events which affected our results in that year and which need to be considered in analyzing year-over-year comparison between our business performance. The events were the sale of our EIS business, which took place in October of 2001. We had a gain on that sale. We also had revenues for 11 out of 12 months of our fiscal year and about $398m of revenue from that business. And we had operating income of $30m in 2001 that we didn't have in 2002.

We also had a box sale of 1100 acres of property in Sacramento. The revenue show up in the Aerospace and Defense segment in '01, they were $28m in revenue and there was income from that transaction, which again showed up in that segment of $23m. In 2001, we had income from employee benefit plans in excess of the income that we had in 2002 of $30m, which flowed through operating income. $24m flowed through aerospace and defense, and $6m flowed through GDX automotive. Doing an analysis taking those three factors in account shows that we had year over year improvement in each of our operations at the business level. In terms of GDX automotive the comparison between '01 and'02 sales were $2m less than ' 02 at $806m. Operating income was $38m in '02 vs. a negative $4m in '01 or $42m improvement year over year. In addition in'01 we had $6m more of income form benefit plans, so the year over year variance is $48m and again that's set out on the table on the press release on page 2.

In terms of Aerospace and Defense we had sales of $640m in '01 and in '02 we had sales of $277m reported. If you take out the sales from EIS of $398m and you take out the sales form the Boche real estate sale of $28m. The comparison is $214m in 2001 and $277m in 2002 or an increase of approximately $63m. In terms of operating income in '01 we had a $131m reported $30m of that was income from EIS, $23m was income from the Boche real estate sale and $24m was excess income form pension or from employee benefit plans. That gets it to a comparison of $54m for '01 compared to $59m for '02. In terms of our Fine Chemicals Areojet Fine Chemicals segment that's the easiest segment to compare there was no pension income in that segment. Sales were $38m in '01 and $52m in '02, a $14m increase and operating income was negative $14m in '01 compared to positive $3m in '02 or $17m improvement in earnings.

In terms of total improvement in operating earnings year over year based upon on that and now it is, by that analysis we improved by $70m in operating income between '01 and '02 from the businesses. This improvement in operating results were brought about by a great number of new members of our management team and these new members joined us in 2001 and 2002. At our Aerospace and Defense, we have put in a new President in 2001, Mike Martin. At GDX automotive we put in a new President. In the middle of 2002 Mike O'Brien. At real estate we added a President in '02 Bill Predie. At AFC in late 2000, we added new President Dr. Joe Carleone and then a corporate this year. We promoted and added several positions Jasmine Say I was promoted to CFO. Greg Scott was added as General counsel and Doug Jeffries was hired as Controller and Kari Van Gundy was hired as Treasurer. When we look at 2003 we put out some guidance, for 2003 for all of GenCorp. We expect revenues to be flat at about a billion one, with no significant income from employee benefit plan. In '03 we expect our net earnings after tax from operations to be up approximately 20% when compared to net earnings in 2002 excluding the income from employee benefits plan that we earned in 2002. Our forecast for earnings per share for the year is between $0.41 and $0.46 per share and approximately 20% with the number of $0.44 per share year-over-year.

The segment breaks up as follows: For GDX Automotive our biggest segment, we are looking at revenues between $700m and $730m. Operating margin between 5.5% to 7% and segment income above '02's $38m. In terms of the market, we are contemplating a flat automobile market; we could absorb some lower volumes and still meet our operating income goal. In Aerospace and Defense, we are looking at revenues of $265m to $275m and operating margins of 11% to 13%. In those numbers we have not factored the impact of our recent notification that we were awarded EKV vehicle for national missile defense. We do not yet know what the volumes and timings on that award will be or the impact on Aerojet's numbers in '03. We also do not know the impact of the NASA budget, which has not yet been approved in '03 for Aerojet.

In our aerospace and defense segment, we also book our real estate. We have not included any real estate transactions sales or JVs in our forecast. We do expect to do some JV's and perhaps if the price is right even some outright sales in '03. In terms of AFC we are forecasting revenues between 52 and 57 million and operating margins between 6.5% and 8.5%. In terms of our strategic focuses for fiscal 2003, obviously our first one is to meet or exceed our earning guidance that we have given out. Second is to accelerate the monetization of our real estate assets in California. Our third is to continue to look for acquisitions to grow our aerospace and defense segment. Our fourth is to increase the sales and backlogs in all of our business to grow 2003 and 2004 revenues and earnings. And we want to improve our cash flow in our balance sheet for 2003. These are the challenges but we believe that we have positioned our businesses in the right manner to achieve them, and we believe that we have the right management team to achieve all of these goals. So if you have any questions I will take them right now.

Ladies and Gentlemen if you wish to queue up with the question, please press the number on your touchtone phone. You would hear a tone indicating your line has been placed in queue. If you pressed one prior to this announcement, we ask that you please do so again at this time. You may remove your line from queue at any time, by pressing the pound key. Our first question is from the line of Harriet Osmond, Deutsche Bank.

Good Morning.

Hi Harriet

Terry, I was wondering when you kind of first got a glimpse of '03 expectations in December, you mentioned that you thought the business would be upward and cash flow positive and had a shot at free cash flow positive but weren't really certain to given the time and particularly since the potential defense contract. Any update on that?

What our goal is, for a cash flow and we think it is reasonable -- is to do between 10m and 25m in positive now that is going to depend on some timing that we've still don't know primarily in the defense area we don't know whether we are going to win any additional NASO awards and we don't know the financial impact of the EKV award because we don't know timing and volumes. What we have been told is again time is of the essence for the EKV bills and that the government has suggested that margins opportunities will be higher in that program and they've historically been in defense programs but again all that is - it's speculation and rumor. In terms of the other thing that could impact, the numbers is - do we do some sales or not of real estate, but right now we would say that we think the goal is achievable.

And I think the EKV is a possibility or can you think of a scenario that would actually be cash flow pressure in '03 but obviously positive for reported income and perhaps cash flow in '04.

Depends again on what form the government requests the bids whether they are cost plots or whether they are fix price. I don't think there is a big capital build up though that for that program.

Great and then there was another small impact GDX's that to know in the fourth quarter of a charge was the nature of that - was it just - -

The nature of that was a re-structuring charge where we are taking out some more head counts and actually we are consolidating two plants into one plant in Germany. So we get the benefit in '03.

And what's the - a recent consolidation over say shifting events to central Europe as a factory base?

That's yeah. One was the cost, the two plants are close enough together where you don't have to go in and do a huge payment and negotiation with the workers counsel because of their distance apart that's not considered in essence a closing of a facility.

That definitely makes life easier.

Yeah.

And then what did for - What did CAPEX end up coming in at for 2002?

Coming at 45.

And in terms of the range of 40 to 50 for '03, what's the management factor between being at the lower and higher that range?

We would certainly hope that's going to come in at lower end but to some extent it depends on what kind of a platforms are coming in at the GDX business.

Yeah,the more platform wins, the more you spend on CAPAX.

And one last question before - would some body else pester you and GDX you mentioned price constraints were about 20m impact but that was about a 2.5%, is that the right way to think of that and is that any lower than it has been?

No. Usually what we see is, that's the way it averages but we give higher price downs from our North American customers than we get from our European customers.

Okay. Pretty steady price environment still going down.

Yeah it-l probably will go down again.

Forever?

Yeah.

Great. Thanks.

You are welcome.

And the line of Wayne Arcembo of Black Rock.

Yes. Good morning thank you. Just a question on the real-estate, if I remember correctly you hired some one to look at this real estate probably nine months ago or so, could you give us some update on the progress that's been made there in terms of trying to monetize some of this land that you have, you are sitting on?

Sure. We now have five people in our real estate department, all our real estate professionals and so, there has been three new hires.

What we have done is one we started and at least completed a preliminary plan for the entire site, which is approximately 12,100 acres. We will obviously do some more planning and will have to get into more detail. We are focusing primarily on 2,600 acres that were taken out of the super fund site and in late '01 and what we are going to do with that property. What we have is we have zoning authority for approximately 1100 of those acres to put up office, light industrial uses. The rest of the 2600 acres, what our planning tells is we need to get it re-zoned into residential. Residential re-zoning in California is a rather lengthy process. We are told that it's any where from 2 to 5 years to get it done and so, we are starting to work on that. We are fortunate in that a good portion of that property is in a newly incorporated city called Ranch O Cardova , which actually becomes a city July 1. In California, what they have is they have a requirement of revenue equalization for our newly incorporated cities which means the county of Sacramento has to, -- for some long period of time, I forgot whether it is 25 or 30 years, has to receive the same amount of tax revenues that are received prior to the incorporation. Which means the city is quiet anxious to grow their tax revenue base and quite anxious to help us get our re-zoning and our development done. So, maybe we can do at the lower end of the time range that I gave you. In terms of the 1100 acres that's already entitled, we are currently negotiating joint ventures where we would contribute the land. In return the developer would be our partner and contribute the improvement to the buildings. We expect to be able to announce something hopefully within the next month or two on that. We are also, have been approached by several parties who wan to buy some small parcels, what we consider as attractive prices between $7 and $9 a square foot and we are looking at that. Assuming that those transactions do not end up with a use, which deludes the value of the surrounding property, that is some thing that we will probably, also do this year.

How much could you say that was a square foot?

Between $7 to $9.

Thank you very much.

You are welcome

Edward O'Connor from TKR Capital.

Hi. I was just wondering if could take us through your liquidity issues particularly with regards to your bank credit in terms of the size of the line and what is available?

Right now what we have is we have a revolving credit facility in the amount of $137m. As of November 30th, $45m of that was drawing upon. We have got term loans. We have got term loan A approximately of $70m and then we have a term loan B of $115m. We also have convertible subordinated notes at $150m.

And what is our standing under term loan A? Is it all drawn out?

Yes.

And the term loan B?

It's all drawn out.

So, it is all drawn out also. Okay. In the October quarter you had about $22m of LCs at a revolving level, is that still there or is taken care of now?

Yes, that's still there.

That's still there. So, I mean is it right to say that your total availability is around $70m?

Yeah, and then the other thing to note to is that we have got cash on our balance sheet. Our closing balance sheet cash balance is lit up compared to what they were at the end of last year by about $4m and the total cash balance and cash equivalents of $48m at the end of the year on the closing balance sheet.

Okay, I might have missed it. But I believe the question was asked here. Would you be cash flow positive this year? I mean terms of free cash flow or is it too early to say?

We hope to be cash flow positive in the range of $10m to $15m.

And that will be on the operating level or... ?

At the bottom line of the free cash flow.

Okay. All right, great, thank you, so much.

Michele Roesler, CJS Securities.

Good morning. Terry you talked a lot about potential acquisitions in the propulsion area. Could you give me a sense how the sort of change in your pension over funding of lack of that at this point might affect your thoughts on acquisitions?

I don't think that it will, Michael. As you know, we still have an excess in our pension. It is about $70m, which is a little unusual given how the market has performed but we do have excess. In terms of when we are looking at Aerospace and Defense acquisitions, particularly on to the extent that they are mostly Defense. In that case if they do have a deficit, you are allowed to add it to the cost structure and have the government fund out the deficit. So, if we did purchase somebody without a deficit, our choices are either to use our surplus or to simply add it to the pricing that will give the government and put it in our cost structure and how the government fund it over time. So, it doesn't relate impact, what we are going to do on Aerospace and Defense acquisition.

Then sort of a follow-up on the last question. What sort of flexibility would you have at this point beyond, maybe that $70m to use for acquisitions and do you think your banks are open to that? What type of multiples you are seeing right now?

We believe our banks are open to that. As you know, we have shelf. I believe it's about $300m. Our discussions with our banks have given the pricing that we were looking to pay assuming we can achieve that with a quality acquisition but financing is readily available. We also have obviously other options. We could sell more property or do something else with our portfolio.

And to that give us some indication of how we will be talking about fine chemicals at some point this year?

I didn't specify, what part of our portfolio we are looking at. Right?

Okay, and just a quick question in terms of Defense. Is there anything assumed in your current forecast for '03 in terms of revenue from the X-38?

No, there is not.

Okay. That is all I have for now.

Okay, thanks.

James Glassman of McMan Securities.

Yes, just a point of clarification. How much if any pension income was included in the 4Q actual. How much if any is in the 1Q guidance.

There is nothing in the first quarter guidance at all. And pension income for the year in total was about 36 million, and roughly a fourth of that comes in in the 4Q.

Okay. Thank you.

If there are additional questions please press one now. We have a question from Edward O'Connor of TKR Capital.

I am pretty quite new to this story but could give us a just a budge on, how you share your environmental burden with the defense department.

Yes. We have an agreement with the Air force on behalf of the U.S government. The agreement says that we are allowed to put 88% of our environmental costs. Defined very broadly is legal fees, study fees, remediation fees, damages and awards from litigation into our cost structure. And we are allowed to collect 88% of that cost as an allowable cost. So in other words it flows through our revenue line, but we have no profit on it. So every year like we do with labor, like we do with utilities, taxes and other things we estimate what we are going to spend that year. And we put it in our forward rate pricing pricing. And we collected every two weeks or every month whatever the payment cycle is from the government. And then we spend it on what we forecasted that we are going to spend it on in terms of environmental. What it does to our balance sheet is we have on our balance sheet both the liability for our reserve for environmental - and we also have an asset, which is a receivable from the government, for what we are going to recover from them, as part of that 85%.

Okay. Thank you so much.

We have no further questions. Please continue.

Well with that I would like to thank you all and we hope that again we meet or exceed your expectations for 2003. Thank you.

Once again ladies and gentlemen this conference will be available for replay after 11:30 AM today until January 31st at mid night. You may access the replay service by dialing 1800-475-6701 and entering the access code 671365. International participants may dial 1320-365-3844 and entering the same access code 671365. That does conclude your tele-conference for today. Thank you for your participation. You may now disconnect.