Aerojet Rocketdyne Holdings Inc (AJRD) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the GenCorp third-quarter 2003 conference call. At this time, all participants lines are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given to you at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I would now like to turn the conference over to Linda Cutler, Vice President of Corporate Communications.

Thank you, Leah (ph). During this call, GenCorp's management team may make forward-looking statements as defined 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 statement represent management's current judgment on expectations for future operations.

We encourage you to review the cautionary language regarding forward-looking statements and the factors contained in our third-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. These statements and factors could cause business conditions and actual results to differ materially from those expected by the company or expressed in our forward-looking statements. Now I would like to turn the call over to Terry Hall.

Thank you, Linda. Good morning and welcome to the call. I'm going to take you through the results for the quarter. During the quarter, as you can see in our announcement, we lost five cents per share or $2 million, compared to $8 million or 19 cents a share a year ago in the quarter. While our Aerospace and Defense and Fine Chemicals business are doing quite well, we had problems this quarter with GDX Automotive.

The problems were caused by reductions in volume primarily from (technical difficulty) European manufacturers. We saw problems in Germany and in France, and in our Salisbury, North Carolina plant. The GDX results were down about 8 percent year-over-year or $16 million. Lower volumes resulted due to a lack of sales of one of the platforms that we are and also at the same time, the launch of the new Golf A5 platform in Germany.

At the same time we saw increasing pricing pressures and we saw some unscheduled stoppages and closures of our plant for temporary periods due to some OEM labor strikes in eastern Germany. We continue to push and improve the performance of GDX. We have taken some personnel actions there and there's some cost of that in the quarter.

We continue to look at what we can do to increase the profitability, and we do expect that segment to be profitable in the fourth quarter of this year. In terms of our Aerospace and Defense business, we are seeing good things there. Sales increased 57 percent to 99 million, earnings increased 50 percent. We had the benefit of a $15 million real estate sale during the quarter, which provided about $10 million in operating income.

We continue to see strong spending by the government in terms of national missile defense. Our Atlas V program has firm up considerably. As you know, we do the boosters on the Lockheed Atlas V program. With the announcement by Boeing that it's not going to try to sell its product, the Delta IV, in the commercial market, and with the punishment that has been instituted by the government to Boeing, they lost I believe ten launches due to some illegal bidding action that regrettably took place on the Atlas V and Delta IV. We see our backlog firming up.

In terms of things that still are a little weak in our Aerospace and Defense business, we still don't see a whole lot of NASA business. As you know, NASA is on hold waiting for the return of the shuttle, and this particular segment had lower non-cash pension income of about 5 million less than it had in the prior year. In terms of closing our ARC acquisition, we expect to close that acquisition within this month.

We have been negotiating with the Federal Trade Commission. We believe that next year that will mean that this segment will be between 450 and 500 million in revenues and will certainly give us a nice position with 50 percent or so of the market and the tactical missile market. And we are looking forward to getting that finally closed.

In terms of our Fine Chemicals business, again we saw a nice quarter. It was about flat to last year. Aerojet Fine Chemicals for the first nine months has done about 9 million better in operating profit than it did last year during the first nine months. It has made $8 million versus a loss of $1 million. We continue to see strong demand for the product.

Our backlog is looking pretty good, and we expect to see that business continue to prosper. Finally, real estate. In the the third-quarter we did a sale of a small parcel of land with an office complex on it. It is currently leased to the State of California, Department of Corrections. We have sold that property for $15 million and recognized about a $10 million operating profit.

We intend to continue to accelerate recognizing the value of our real estate and expect to do several other sales this quarter. And as I think we have told the market, we expect to be able to do between $15 and $20 million of sales annually going forward the next year or two until we complete the rezoning of our property that would allow us to not only sell commercially zoned property, but residential zoned property.

Also during the quarter we reached an agreement with the County of Sacramento which provides that the county will provide water for our development going forward. In return, we will be transferring the water that we clean to them and we are currently cleaning somewhere in the neighborhood of 14 million gallons a day of water for them. In terms of our forecast, we are still holding our numbers of 41 to 46 cents for the year. That number, due to the shortfall in GDX, now includes real estate proceeds. And with the fact, I will open it up for questions.

(OPERATOR INSTRUCTIONS). Michael Roesler (ph) of CJS Securities.

Could you talk about some of the specific actions that you are going to be taking at GDX to fix what is going on there?

We have changed out a fair amount of the management team. We are also looking at our cost structure and how do we reduce our cost structure. One of the issues that we have is we have plants in a number of different countries, particularly in Europe, and as you know, a lot of our revenues are driven by plants, or by country's specific OEMs.

We're looking to see whether we can't better balance our plants with the demand that we're seeing from the OEMs. At the same time, we're looking to reduce scrap. We're seeing some high scrap rates driven primarily by new launches in Germany. And so we are looking at all areas of our cost structure to try to take that cost down.

You mentioned that segment, getting back to profitability in the fourth-quarter, is that going to be in line with what we have seen x-ing out this past quarter, or still below the improvements we have seen in the last two years?

I think it will be below the improvements we have seen the last two years. A lot of it is driven by how fast did we improve our launch costs.

And what do you think the real estate sale contribution will be to your earnings in the fourth quarter?

We are expecting it to make up $4 or $5 million.

Of operating profit?

Yes.

Okay, that's all for now. Thanks.

Jim Foung (ph) from Gabelli & Co.

I was looking at the off numbers from Sequa and their revenues are pretty much on track with what you have indicated, but the margins are much less, I guess in terms of the six-month run rate in '03 versus a year ago in '02. Could you talk about what kind of -- what is happening there in terms of ARC and what kind of margin we should be using when we look at '04?

The problems that you see when you look at ARC as it is reported by Sequa is they also put in their auto.

No, this has been (indiscernible), they discontinued the --.

Terry Hall They discontinued it?

Right, in their last filing. They discontinued the propulsion business, they put that on the discontinue and then in the Q's they put the six month results.

Jim, they have a lot of allocations that they do too internally. So what you're seeing being reported in the Sequa financial statements is the numbers based on their structure. When it comes into our operations, it comes in in a different structure.

So I cannot use -- the operating margin is six-months, was like 5.1 percent. And that compares to our 7.2 a year ago.

That has to be after corporate allocations.

Okay, so I guess we are going to have to adjust that then?

Yes. We're also, as you know, Jim, looking at some restructuring that is going to take some costs out of the two as we combine them.

So after you get all that done, should I be looking at the propulsion business being similar to your Aerospace, Space and Defense margin in '04 then?

Yes.

And then just a couple of housekeeping things. What is the tax rate I should be looking at for -- I guess you had a credit this quarter. What should I be looking at for the year and also for '04?

'04, I think we still need to give guidance on and we will later on in the year. But right now our effective tax rate barring any other issues, is 39 percent. But for the fourth quarter you would be looking at 39 percent. It is lowered by settlements that were received this quarter.

And then also you are going to have it relooked at. And you have a corporate expense, I guess. Does that follow a similar pattern as last year's corporate expense?

Yes, you're probably looking for corporate expense somewhere between $7 to $9 million a quarter.

Okay. That is pretty much all I have. Thank you.

(OPERATOR INSTRUCTIONS). Derek Dobecki (ph) from Ironwood Capital Management.

Just a strategic question for you. Given the current issues with the GDX and the changeover of management there, do you really consider that automotive business core to your long-term business plans? And if not, had never considered selling that business, especially to use the proceeds to help pay down your debt?

What we consider core to our business is our Aerospace and Defense business and our real estate. And the two, as you know, are tied due to the fact that we have an agreement with the government where the government pays for the remediation of any environmental issues on the property. So that is what we consider core. The auto business, certainly at the right price we would sell it. The issue has always been that auto is not particularly seeing great price right now, but it is not something that we would rule out.

Okay, thank you.

Steve Velgot (ph) got from Cafe Financial.

I wanted to just go back to that statement you made about the real estate business being tied to the aerospace business, because I think I understand about the government reimbursing part of the cleanup, but I'm not sure I understand how that is tied to, especially the 4,200 acre parcel of real estate that is currently under either development or predevelopment.

Here is how it is tied. We have an agreement that we signed with the Air Force on behalf of the U.S. government which basically says that we can charge the U.S. government in whatever form, up to 88 percent of the cost of remediation studies, litigation costs, any awards of litigation that result from litigation, we have not had any.

And the way that we recover that expense is, every bill that we send to the U.S. government or to a prime that is ultimately working for the U.S. government, a portion of our costs for environmental is put into that do. And so as long as we remain in Aerospace and Defense business and as long as our ultimate customer is the government, we are able to put a surcharge, you could say, on those bills and the government pays it. Under government cost accounting, it is an allowable cost.

So that means one, the bigger we get and for example ARC will be part of this agreement, the more base we have, revenue base, we have to spread that cost across. And also it means that we will stay in the business as long as we have environmental issues that the government is obligated to reimburse us for.

I suppose what I do not understand is, does that preclude you from doing something strategic with the real estate in terms of separating it from the rest of GenCorp?

No, it does not keep us from separating it. Obviously you would only -- if you were going to contemplate restructuring in a way to get the real estate out, you would only do the real estate that is out of the Superfund site.

Right, okay. Thank you.

Andy Green from GenCorp.

Yes, from Wachovia. Just one quick question. I was wondering -- you mentioned that you will be selling -- we could expect 15 to 20 million a year related to real estate sales prior to the rezoning for residential. Could you give us the year estimate in broad terms as far as the timing of the rezoning to residential and what has to happen for that rezoning to take place?

We expect the rezoning to take between 18 months and 30 months, and probably 24 months is a good forecast of that. What has to be done is you have to make an application to our zoning authority, which is for the western half of our property, which is where we primarily seem to be focused right now, is the new city of Rancho Cordova. As you know, in California when you become a new city you have to equalize or continue to pay the county the same tax revenues that they got before the incorporation, which means for a newly incorporated city like Rancho Cordova, they have two choices to increase revenues.

One is to increase the tax rate. The second is to support and move along as fast as they can, development. We are the biggest open space and probably one of the few undeveloped areas in the new City of Rancho Cordova. So we, in their interest, are aligned to see development or rezoning occur relatively quickly. There is a bunch of technical steps that have to take place.

One is, there is a statute called CEQA in California, where you in essence do an environmental impact assessment. That, with its hearings, about as fast as you can do it in California is about 18 months. Obviously the city is anxious for us to do, get development going in their city, and we expect to have a very good opportunity to meet a timeline that is somewhere in the 18 to 24 months from now.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). A follow-up from Steve Velgot.

Terry, concerning the zoning for residential, is that any of the property that is along Route 50, or is this just the property that is adjacent to the 1,100 acres that was sold a couple years back or a year ago?

It is primarily the latter. There is really not much or any, I don't think, that would be on Highway 50.

Okay, that is still more industrial type development?

Industrial and commercial, yes.

Okay, thank you.

Mr. Hall, we have a further questions. You may continue.

All right. Thank you all for being on the call and we will talk to you in a couple months at the end of the year. Goodbye.

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