Aerojet Rocketdyne Holdings Inc (AJRD) 2003 Q1 法說會逐字稿

Thank you for standing by. Welcome to the GenCorp first quarter earnings teleconference. 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 and star, and as a reminder today's conference is being recorded.

At this time I'd like to turn the conference over to the vice president of corporate communications, Linda Cutler. Please go ahead.

Thank you, operator, and good afternoon.

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 statements section of our first quarter 2003 earnings release as well as 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 please note that a telephonic replay of today's conference call will be available from 4:30 today through Friday, April 4th. This call is also being audio broadcast and will be available on GenCorp's web site at www.gencorp.com -- Terry.

Thank you, Linda. Good afternoon.

I have with me Yasmin Seyal, # our senior vice president and chief financial officer, and she and I will take questions after I get done with a few comments.

GenCorp reported its first quarter earnings today. What we had was 271 million in sales, 3 million in earnings and seven cents in EPS. Our sales were up and that was primarily driven by better than forecasted revenues at our fine chemicals unit. What we're seeing in fine chemicals is a increase in demand for both HIV drugs, cancer drugs and other tyral (ph) separation drugs.

At the beginning of the year we had told people that we expected that business to do 54 to 57 million in revenue. We now have sales forecasted for the year that are in excess of that and should be about 15% up year-over-year. In terms of our earnings for the quarter, it compares to 7 million -- or seven cents last year, or 3 million dollars. Last year we had $10 million pre-tax of pension income in the numbers; this year is pure operating numbers and so our quality of earnings have gone up.

In terms of our other units, GDX Automotive performed to plan. Their low quarters in terms of margins are Q1 and 3. We expect higher margins and higher revenues in both Q2 and Q4. Right now what we see in our auto business we have visibility out to the end of our second quarter. We get 60 day releases from our customers. And right now it looks like they're on plan and should be fine through the second quarter.

In terms of our Aerojet business, it performed to plan. It had 63 million in sales and 9 million in EBIT. That compares to 16 million in EBIT a year ago of which 5 million of the EBIT in the first quarter of '02 was pension income. The margin there was affected by the mix. We continue to work on Atlas V, it caused a use of working capital in the quarter and right now we're not scheduled to deliver the first production unit until, first two production units until May or June, depending on the launch date that's still moving around.

In terms of our real estate business, today we announced a joint venture with the Panattoni construction company to do an office development. We will contribute to that joint venture about 20 acres of property and the Panattoni company will do the zoning and the building -- I'm sorry, the zoning is already there. It is also likely that we will do this year some small real estate sales. When we talked to you about the year earlier we told you in our numbers that we did not have any sales planned. Right now we're seeing some strong valuations of some of our parcels, which would lead us to believe that it is the time to monetize those parcels. And so if we continue to see that kind of interest we will sell perhaps one or two small parcels, and we're talking about numbers probably below 10 million in terms of sales or profit.

The business itself is running pretty good, or all the businesses are running pretty good. Cash flow was ahead of plan for the quarter, though it was still negative. We added debt of about $10 million. That was driven again primarily by Atlas V working capital. That should turn around in the second half of the year and we still expect pre-cash flow of between 10 and now 35 million dollars, depending primarily upon the performance of our business.

In terms of acquisitions, we have nothing to announce at this time. We continue to try to do acquisitions for our aerospace & defense business, and as soon as we can announce something we will.

What we're seeing for the business right now is we're still on track to meet our guidance, which was 42 to 46 cents. Our guidance for the second quarter is 15 to 17 cents per share. And again there will not be any pension income in those results.

I guess with that, I would open it up for any question that you might have.

And if you wish to ask a question, please press the 1 on your touch-tone phone. You'll hear a tone indicating you've been placed in queue. You can remove yourself from queue at anytime by pressing the pound key. If you're using a speakerphone, please pick up your handset before pressing the number.

Question from Michael Roesler (ph) with CJS Securities. Please go ahead

How are you doing, Terry?

Okay

Could you sort of talk a little bit about auto * heading into the second quarter now. Obviously you had some pension income last year. Talk about how, what margins could look like and what would drive, say, improvement year-over-year if you're still going to get to the target you previously had talked about?

We -- here's the visibility we currently have: We've seen through the end of March, which is one month. It is on plan. We expect margins to be 8% or better in the quarter. And we're not really seeing any impact of the reductions announced by Ford and GM in North America. And in Europe actually we're seeing some fairly strong indications that we're going to get additional revenues there above plan.

Right now we're happy with the performance. And once we get past Q2, Q3 is usually a lower quarter in terms of earnings and Q4 is one of our stronger quarters. Right now it looks good. Again, we don't know what the impact of the war will have on Q3 and beyond, but everything looks okay at the moment.

And one of the areas that the car companies have been focusing on is China. Can you update us on your current operations there and any plans further?

China, we have one plant, it's a joint venture. We have 60%. Right now what we're seeing is that plant will probably run to capacity this year. That's about 20 million dollars, depending on the exchange rate with Ramimbi's (ph). And I expect that we will have to add capacity there. The way initially you add capacity in turn is you work seven days a week, 24 hours a day, because labor costs are so reasonable. We pay about I think a dollar an hour -- or a dollar a day for labor costs there. So initially we will try to add capacity through labor. Eventually we're going to have to add another plant.

Okay. Now, just shifting gears quickly to the defense segment. Any of your programs being utilized right now in Iraq?

Well, we can't say that for certain and it's not a question I really want to answer. We delivered a lot of things to the DOD over the last couple of months, and one of the bright spots in Aerojet's forecast is armaments so that's about as much as I can tell you.

In terms of cash flow, I think your last conference call you mentioned 10 to 25 million in free cash. Now you sort of expanded the top end of that. What's driving that?

It's partly driven by better performance from the operations. So we did see better cash flow in the first quarter than what we had in plan. It was still negative. And part of it is driven by we had no land sales in the numbers when we talked to you, when we gave the original guidance.

And just in terms of acquisitions, you have the financial flexibility at this point given another 30 million used for the lawsuit bonds to continue to pursue acquisitions?

We believe so and actually our plan shows growing liquidity throughout the year.

Okay. Thanks.

Sure.

Our next question is from Derrick Wanger (ph) with Jefferies (ph) and Company.

If I could ask a few financial details, what was the depreciation and amortization for the quarter and the capital expenditures as well, and then the capital expenditure guidance for this year?

The depreciation and amortization for the quarter in total was 18 million and cap-ex is 9 million. And our depreciation and amortization is still consistent, is consistent with the guidance that we had given before for the year, ranging about 67, 70 million and cap-ex ranging somewhere between 50 to 60 million for the full year.

Thank you very much.

Our next question is from Jay Glassman (ph) with McMahon (ph) Securities. Please go ahead.

I'd like to understand how much current bank availability you have, how the olin (ph) bond you posted plays into that and how you think you would most likely finance additional acquisitions?

Let me talk to the availability here. Our total revolving credit facility has an availability of 137 million. And we probably have availability after posting the olin bond of about 30 million on that, which is being reduced --137 is reduced by the borrowings. And also the total LCs posted and our total letters of credit posted at year-end were 22 and then we've added additional 30 million for the olin bond and a couple of million from all other LCs, which leave us with a net availability of about 30 million under the revolving credit facility. But we also have some additional borrowing capability available to us and would hope to increase our liquidity over the year to additional credit facilities, too.

And if you were to think about acquisitions, with the stock at six and change, is it more likely you would go the debt route than the equity route?

Yes.

Okay. Thank you.

Our next question is from Susanna Matter (ph) with Deutsche Banc. Please go ahead.

Good afternoon. My first question concerns the pricing pressure at automotive. I was wondering if you've seen that pressure accelerate recently or if it's been more of a continuation of the same trend?

I think it's been a continuation of the same trend. It's not outrageous and it's not spiked. So it's the same thing that we've seen before. In part, the margins of GDX were impacted by -- we did a couple of force reductions during the quarter which we expensed rather than taking any special charge for. We laid off 200 plus people just to get the higher margins, and more * efficient manufacturing. We should see the benefit of that in Q2 and Q3 and Q4.

Okay. And then my next question concerns the real estate joint venture. Do you have any sense of the timing on that development program? For example -

I think it will depend primarily on the demand. Right now there's not a strong demand for office buildings in this area, driven by I think both the downturn in the economy and the fact that a lot of dot com and communication companies used to be located here who don't exist anymore. So it's basically going to be more driven by market demand and we got to do it by June or by next year.

Okay. And you had mentioned that the zoning is actually already in place for that?

Yes, we have zoning for the office, so it's not a zoning issue, it is merely a demand issue and getting the plans approved and getting everything in place. So as soon as the market picks up, we can start putting the building up.

Okay. Great. Thank you very much.

You're welcome.

Our next question is from Josh Hecter (ph) with Steel Partners (ph). Please go ahead.

Could you help me with the foreign exchange rate at GDX. You had a $60 million impact on the top line. How does that translate into the operating income line? ? Does it net all the way down?

Yeah, you certainly see a benefit coming down to the operating line and at the operating line, given where we are in the margins for the first quarter, it's probably a few hundred thousand coming to the actual operating line.

Okay. And 10 to $35 million of free cash flow that you were talking about for this fiscal year. Is that after tax cash flow or is that before tax?

After tax.

After tax. Okay. Thanks.

Our next question is from Jeanine Obershay (ph) with Wachovia. Please go ahead#.

Can you give us a sense when you talk about maybe selling off more real estate to the tune of about ten million, are you talking about more commercial real estate or residential and just how much of your property are you looking at, including those transactions. And then also with the joint venture that you're talking about, can you give us a sense of how that would be operated once you get started on that? Are you actually going to be managing property?

Sure. In terms of our real estate and what we can do in sales, we currently are contemplating a program where we can do 10 to $15 million per year of sales, just based upon values, if the values hold up. And what we do is we do an analysis a PB analysis that says the present value is - is it great enough where we don't get that much incremental value going forward? So it's a program that we will probably do if values hold up, not just this year but in '04 also, and it's not huge parcels of property.

In one case it may be an office building that we're currently leasing. And other than that it's small pieces of parcels, small parcels here and there, 10 acres, 20 acres, that have demand because of what's around them. In terms of the joint venture, we will not be managing the joint venture. It will be managed by Panattoni Company, that's what they do for a living. I think ultimately it would be contemplated that at some point in time in the future that also would be sold, and we would get a share - we would cover our capital and get a share of the profits at that time.

Great. Thank you.

You're welcome.

Our next question is from Jim Foun (ph) with Gabelli & Company. Please go ahead.

Hello Terry.

Hi, Jim.

I guess you mentioned the pension income. You had ten million last year and then in your press release you had five million less this year. So essentially you have five million this year?

No, we have zero this year.

You have zero this year.

Effectively zero. Slightly positive but it's not a large number.

OK, so then* - but what pension income did you have last year? Was it ten million.

We had ten million per quarter.

In total.

Pretax per quarter.

Ten million per quarter. And then could you just talk about the Aerojet margins, I guess, and that business? The revenues were a little better than what I was expecting. And on the margin side, you know, you talked about 11 to 12 percent -- 11 to 13 percent margin for the year but I guess ...

I think we had 14 in the first quarter.

14. Yeah. So do you think we could see -- could you just talk about how the margin would flow out would you get some upside if you continue at these kind of run rates?

I think if we can exceed the revenues [inaudible] I'm not sure we'll see up side over these margins. I think these margins were driven more by mix and again the mix was more towards production and less towards R&D. And some of the future quarters you'll see more R&D and less production. And that's going to drive margins down in some future quarters.

Still for the year we'd be looking for margins in the range of 11 to 13 percent.

Okay. So that's kind of -- I mean I guess the first quarter is a pretty good showing to kind of, for that 11 to 13 percent. You possibly could have some upside there if you get some of the revenues that you anticipate, because you want to talk about the NASA business? Are you seeing any kind of ...

Right now we're seeing the things that NASA tells us what they want to. And we've got some indications of some small business. They told us they were going to award eight million dollars of business that we didn't have in the plan. But NASA is still talking about what they're going to do about the shuttle and all that stuff. So right now NASA is I would say is not business as usual.

Okay. And then you continue to get real estate rentals in the quarter?

Yes, we did.

Was that like about half a million dollars for that quarter?

Yeah

All right. That's all I have. Thank you.

Our next question is from Ken Heller (ph) with Kilarney Capital (ph).

I was wondering where you were in terms of factoring utilization in the automotive business and we see cuts that have been announced. Obviously you've stated you haven't seen any impact yet. But how much flexibility is there in terms of additional cuts, production cuts in terms of you having to potentially cut back on some of the capacity that's not utilized currently?

Here's where we are. We're currently utilizing somewhere around 60 percent of our capacity, which means at some point in time, if it got bad enough, we might need to close an additional plant. We've chosen so far not to do that because we see a fair amount of potential of additional revenues coming on line later this year and particularly early next year. In terms of what we've seen, again, we haven't seen SUVs and light trucks being scaled back by the OEMs. I will state this: Ford has announced they're going to do a 17 percent cut in the second quarter of production. As far as we can tell, that cut in production does not include the SUV vehicles that we produce.

They did have a fire in one of their supplier's plants for the Ford explorer. So that reduced volumes of the Ford explorer, but as soon as the fire damage got repaired, the volumes came back up. So we're just not seeing it yet. I have no idea whether we'll see it out in Q3 or Q4, just because right now we're not getting any information from the OEMs that suggest they're going to cut back on our models. So I think everybody is waiting to see what impact and what link the war has on the auto market.

Okay. Could you also address the utilization rates, where you guys ended up at the end of the quarter on fine chemicals. And also where utilization looks like it's going to fall with respect to this visibility on additional business that you seem to have been able to gain in the last couple of months.

I can do that. Depending on mix. We have capacity without using much or very little capital to do somewhere between 80 and $90 million. And revenues at that business. Right now what we're seeing is demand is above 57 for the year. How high is it going to go, I don't know. Obviously the higher the volumes go, the better the margins are. What we're seeing initially is a great deal of demand. More than we've seen before and some of it is for this year. There seems to be a lot more next year. And so with some luck, and if this demand continues to hold, we could be at almost at the lower end of the capacity range that I gave you by next year.

Okay. That's helpful. Thank you.

Sure.

Our next question is from Michael Roesler. Please go ahead

Just a follow-up on fine chemicals. Gilead bought this company Triangle, wondered if you saw any pick up in their business they're working on a drug for AIDs have you gotten any reaction to them.

We're still waiting to see what they might want us to do. We obviously have a good relationship with them and they're a very fine company who has some products that are really selling well

Does your thinking change at all in terms of how core or non-core fine chemicals is to your plan going forward at this point?

We're certainly pondering what we do with that business. It's a business -- our expectations are now 15 percent plus. Revenues were up and much more than that in terms of operating income. So it becomes a very attractive business based upon what we can see in the out look. It also becomes a much more valuable business in terms of its value to the outside. So it's something that we'll continue to try to ponder and discuss and maybe Yasmin and I occasionally have a sushi on it and disagree. But it's something that -- it's only good news

Okay. Any update on award of the GM 900 platform at all?

I don't recall what it is. I think it's this year. But I don't think it's likely until June or July. But I can't swear to that, Mike.

Okay. Thanks.

If there are any additional questions, please press the 1 at this time. We have a few questions. The first from Derrick (inaudible) From Ironwood Capital Management

Quick question. Are you allowed to under your bank covenants repurchase any shares with your availability?

No. We can't do that. We wouldn't do that under our bank deal right now

How about as you generate free cash flow through the years? Is that something you would consider doing?

It's certainly something we would consider doing. Our first priority has consistently been let's grow the defense business because it gives us environmental, greater environmental remediation.

Or paying down debt.

Or paying down debt.

Okay. Thanks.

Sure.

We have a question from Ron Gross (ph) with Barrington (ph) Capital Group

The 42 hundred acres that you have that's not currently under super fund restrictions could you give us some detail how that acreage is currently zoned?

Let's take it in parts. We have 2600 acres that's located along the Highway 50 frontage in Folsom, which is a major street frontage. Of that, approximately 11 hundred acres is zoned business, zoned office. It's a special purpose. It's zoned office, light industrial warehouse. Then we have the majority of the rest of the property is zoned agricultural or industrial mass use. We were a permitted use. What we don't have on any of the properties currently is residential zoning. It's one of the things that we want to do, one of the things that's happening in July is the (inaudible). Part of our property is going to go into the newly incorporated city of Rancho Cordova. We will then apply for rezoning.

Their interest and our interests are aligned in terms of the way they get revenue is they have to have additional tax base because they have to give the county of Sacramento the same amount of revenues that the county had before the incorporation. And so we expect to be working hand in hand with the officials of Rancho Cordova and probably will be able to achieve what for California is an acceleration of zoning, which is about a two-year -- at best it's about a two-year process

Okay. What about the 1600 acres of land that was not subject to super fund restrictions prior to the 2600 -

That's zoned agricultural right now or 80 acre parcels.

Okay.

That's another thing we'll look at rezoning. However that zoning authority is the county of Sacramento, not the city of Rancho Cordova

Okay. Then you have some additional land in Los Angeles; is that correct?

That's correct. We have 400 acres in Chino Hills which is a suburb of LA I think it's closer to Orange County. It's something we're doing clean up, the clean up consists of sifting through the dirt and looking for fragments. It used to be a in essence an artillery range.

Okay. And what are the potential problems that could arise as you attempt to rezone some of that property to residential? Is it just a matter of time or is there potential that it could never occur?

I think rezoning or zoning people will tell you it's an art. It's a government function. It requires as much political skill as it does the ability to draw a plan for the land. We're very -- we think the risk of not getting rezoning is very, very remote in terms of at least the Rancho Cordova property. Once we start doing that, we have the ability right now as probably most of you know, residential is still very, very hot in this area. So we have the ability to turn a great deal of property each year. What we're striving to do ultimately is to have product that's available in terms of land that has zoning for both residential or office or warehouse or perhaps even retail at some point in time. So if any of them are hot, you can start selling at least the paper lots, which means we have zoning but not other horizontal improvements. Whenever that particular market is ripe.

Okay. And finally, the infrastructure costs that would be necessary to fully develop that land, whether it be an off ramp for a highway or something else, who bears the cost of that infrastructure?

It can be done several ways. Typically in California a lot of it is done through bonding that's then the bonding, the pay back on the bond is sold to the lot, the homeowner or the developers. It can be done through a joint venture where somebody like a Panattoni puts up the capital to put in the infrastructure if it's needed. We don't think -- there's already infrastructure in place at the parcel we're talking about with the Panattoni company. So it's done various ways. But the most typical way is through bonding.

Okay. Thank you.

You're welcome.

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

Good afternoon. Center for Performance Investing. My question centers on the hostilities with Iraq. Has this impinged in any way on the priority of the national defense, missile defense system or is it more a reflection of what's coming out of North Korea or statements like that?

We still see the same emphasis on the program, which is they want it done. They want it done soon. We're waiting for details that will allow us to forecast it, which is basically how many units do they want and when do they want them. So we don't have -- we're not able to give a financial impact of that program once it goes into high rate production.

But it's not receding.

It's not receding at all. I think probably with North Korea it's becoming more prominent in the thinking of the defense of this country

How about the HyFly program. What's the time line that we might expect the next year to 18 months?

I think the next 18 months we are required to produce eight motors, something like that, which they're going to fly eight or 14, I don't remember the exact number. Then they've got to decide whether they want to go into a production. It's really a development contract right now

Okay. Thank you very much.

You're welcome.

We have no further questions.

Well, with that, I would thank you all for attending the call and we'll talk to you when we finish the second quarter. Thank you.

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