Aerojet Rocketdyne Holdings Inc (AJRD) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the GenCorp Fourth Quarter Year-End 2003 Conference Call. At this time all participants are in a listen-only mode. Later we will open up the lines for questions and answers. If you should require assistance during this call, please depress "*" then "0". As a reminder, this conference call will be recorded. At this time, I would like to turn the conference over to your host Linda Cutler. Please go ahead.

Thank you, John. Just want to start out by reminding you all that during this conference call GenCorp's management team may make some 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 statements 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 fourth quarter and full year 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. And with that I'd like to turn the call over to Terry Hall.

Thank you, Linda, and good morning everybody. Today GenCorp reported net earnings of $23m or 53 cents earnings per share versus $30m in 2002 or 69 cents per share. We feel that we had an excellent performance from three of our businesses -- Aerojet, AFC and the real estate units. We felt that the performance was poor from our GDX Automotive segment and are trying to do things now to fix that going forward. The issue that complicates the comparison of our year-over-year results primarily is the large swing in pension income. In 2002, we had 35m of non-cash pension income or income from -- of retirement of plans, and in 2003 we actually had negative $3m in expense or employee-benefit programs, so the swing is approximately $38m. And in 2004, we've announced that we expect to have a $55m expense for these plans, again non-cash. So it makes year-over-year comparison somewhat difficult unless you factor that in.

For GenCorp year-over-year we had 82m of what we are calling segment performance -- the SEC prefers that term -- thank you -- prefers that term to segment income, so this is 86m in 2002. The things then to factor in -- in 2003 we had 11m of unusual one-time items, and in 2002 we had 14m. At the same time, in 2002 we had 29m of pension expense -- pension income versus none in 2003. If you factor in both unusual and the non-cash pension income versus expense, the comparison would be 93m of segment income in 2003 and 71m in 2002. What we saw in 2003 was better performance from real estate, from Aerojet, and from our Fine Chemicals units. At the same time the other large swing you'll notice is, in 2003 we had a tax benefit of $5m versus a $12m expense -- tax expense in 2002.

In terms of each of the divisions, Aerojet performance was quite good. Their revenues were 322m versus 271m in '02. The segment profit was 43m in '03 versus 44m in '02. In '02 that 44m included a $12m unusual charge and to it a benefit a $24m pension income expense. If you factor that again both of those into the numbers, the '02 number would have been 32m in segment performance. If we do the same thing for '03, 322m in revenues, 43m in segment profit; they had pension -- positive pension income of 3m versus 24m the year before and an unusual item of 5m versus 12m. When you factor those in the comparison performance, it's 45m of income at Aerojet in '03 versus 32m in '02. Aerojet continues to see fairly robust defense spending. We have received two awards for national missile defense during the divert attitude and control system for both the ground base missile defense program and the EKA missile defense program. We are currently waiting for NASA to inform us what the impact of the new moon-to-mars Presidential directive will be. Right now, we are -- we believe that it's more likely it will be positive than negative, simply because we have such a small amount of business on this shuttle, and we currently don’t have a very [real] business with NASA. If they are to go into space given our leading position in space propulsion, we believe that we stand a good chance of gaining sizeable additional revenues from NASA.

In terms of our real estate segment, again we had very good performance there. Revenues were 32m versus 6m in 2002. We had 23m of segment performance income versus 3m in '02. And the big drivers of the success of this unit were they sold their office complex -- 11 acres 96,000 square feet of office for 15m during the year. We also sold 20 acres to an automobile dealership for $6m and we had some lease income and some smaller estate sales that made up the rest of the revenues. We've decided this year to break out the real estate as its own segment. A lot of the reasons are obviously it is growing in importance in terms of revenue and in terms of income to the Company. Also we've announced this year and applied for rezoning on a 1400 acre mixed-use project called the Easton, which would be on the east portion of our property; and another project called Rio Del Oro, which is 2600 acres, which is on the west side of our property. We continue to push forward on real estate, and as I said we expect it to become a bigger part of our company as we go forward.

In terms of Aerojet Fine Chemicals - another nice performance; this will be the third year in a row that AFC, as we call it, has seen double-digit revenue growth. Revenues were up to 58m in '03 versus 52m in '02. The segment profit was up to 8m in '03 versus 3m in '02. One of the factors in there was we had a $2m payment from one of our customers on what was essentially a take-or-pay contract; as they didn’t take their capacity they paid us an amount, so -- which helped obviously our margins. We do expect to see another year of double-digit revenue growth at Aerojet Fine Chemicals and they seem to be growing their business quite nicely, and we expect to continue to see that trend going forward.

In terms of the one poor performer we had, it was our GDX Automotive business. Revenues were down -- in '02 it was $806m; in '03 it was $786m. Segment profits were down - $8m in '03 versus $36m in '02, though $5m of that was pension income, which we did not have at GDX; in fact, we had a pension expense loss of $3m, again non-cash. The biggest hit for our GDX was the third quarter, when we had a $14m loss. We have seen some recovery in the fourth quarter, but our problems with the business have been a poor launch in Europe, which hit us mostly in the biggest part in the third quarter. We continue to see problems with it; we are improving, but we are improving more slowly than we would like. And we seem to have excess capacity in both Europe and North America. We have announced the closing of a French plant, our Snappon plant; that should close later in the year, and so we still are suffering the losses as that -- at that plant as we go through the closure process as dictated by French law. We continue to look for additional actions that we will have to take. We have reduced management expense. We are also doing some positive actions; we have set up an additional joint venture in China with the largest auto-glass manufacturer in China, which should help us to continue to grow our China business. We have another joint venture already there, which we have had for some 7 or 8 years, and it's growing quite nicely. The Chinese market is softer at about 37% last year, and we are seeing that in our own business there.

We have also gotten some platform awards - most of which are in outer years, which will help us in 2006, 2007; a couple of the awards help us in 2004. Chrysler award on the new [RAM] truck will take -- will get revenues in '04 and now the BMW award on the BMW 5 series will help us in '04; other awards from GM, the [lander] program, which is a crossover vehicle. We've gotten additional award from Ford. New customers include an award from Toyota, and an award from PSA, and an award from Fiat. So we are seeing some broadening of our market, but we still have a lot of work to do in terms of things that we can improve at that business. With that I think, I will turn it back to John and open it up for questions.

Ladies and gentlemen, we will now conduct a question-and-answer session. If you wish to ask a question please press "*" then "1" on your touchtone phone. You may remove yourself from queue at anytime by pressing the "#" key. Once again if you do have a question, please press "*" "1" at this time. And our first question today comes from the line of Michael Roesler from CJS Securities. Please go ahead.

Good morning.

Hi, Mike.

Terry obviously some positives and negatives in this year. Can you talk you talk about in terms of segments expectations for '04? But you -- you know revenue wise I may some idea perhaps more on margin expectations.

I think on margin expectations, particularly Aerojet -- let's start with that. We expect Aerojet to have double-digit margins again next year. They won't quiet be as high as they were this year, simply because the mix has changed slightly with the addition of ARC. What we've told people is a revenue range between I believe 430-470. I think that's quiet conservative based upon what we've seen and what we expect to occur during the year. GDX -- again lower margins, and on GDX, I think, I need to be somewhat careful because it's going to depend on how fast we can fix their capacity problem and their launch problem in Germany. If you look at our focus, it will probably be -- we need to take capacity out of Europe a little more, and we need to fix the launch of the Golf. So, that one I am a little hesitant to give you any numbers, because it will get better, but I think their profitability will be more back-end loaded [inaudible].

Right, but when you say lower and lower in comparison to what?

Compared to this year.

Okay. Excluding charges though?

Yeah.

Okay.

Fine chemicals should be up again 10-12%. Similar margins and that business just seems to be triggered along. Real estate -- probably a little less in sales and earnings, but again high margins, simply because we have no basis in any land that we sell. Again, there the focus is just try to get as fast as we can the zoning that would allow us to go ahead with the Easton project and the Rio Del Oro project. Right now, what we are seeing in Sacramento is a very robust market for residential lots, and it looks like that’s going to continue simply because they are pretty much sold out.

What sort of prices are at lots going on at there at this point?

Paper lots, again no improvement, are going for between $150,000-220,000 an acre. Improved lots are obviously going for lot more than that.

Right and just a final question for now. In terms of -- excluding the pension expense, what sort of normalized tax rate will you use to sort of get to a bottom-line EPS number?

Well, my CFO says 38% but we always do better than that.

Okay. That’s all I have for now. Thanks.

Okay.

Our next question comes from Deutsche Bank from Aloe Olshin (ph.). Please go ahead.

Hi, Good morning.

Good morning.

My first question -- you know Terry you know you gave some color regarding the automotive business some -- you continue to see problems with the launch and obviously some capacity issues. Can you give us a little more color there, first on the launch, you know, what are you guys doing better today? You know, where are still the challenges regarding the launch? And, you know, secondly the moving into capacity, you know, maybe just give us a little bit of background in terms of how many facilities you currently have in Europe, and what do you think the right number is?

Alright. I think in terms of the launch where we are is, we are seeing improvements both in productivity, labor costs and scrap. What we are not at yet is we are not at the standard that we've set; we are getting close. The faster we can get there, obviously, the better off we are. And it is primarily in the one German plant in [Brethraf], Germany, where we are seeing the issues and that is really driven by the launch of the new Golf. In terms of capacity, we are somewhat victims of our own success. We've put in a fairly strict clean manufacturing Six Sigma program here about 3 years ago, and we have increased our capacity to such a level, and we currently have -- I believe it is five plants in North America and about nine, most of them, smaller plants in Europe. Yeah, nine plants in Europe and then one in China. The -- what we are seeing is in the U.S., we probably improved our capacity by one plant, so we probably have about one plant too many. And we continue to improve our manufacturing capabilities, and so we've got really good plant managers who are doing really good job of driving out costs, but that means we have more capacity than we need.

In Europe, it is a question of spreading around the capacity; we are at capacity or pretty close to it. In the Czech Republic, we have additional capacity in Spain, but that seems to growing. We will take out one plant in France, which we announced last quarter and which will not get closed and is costing us money until probably summer or late fall - just based upon the process that you follow in France. And then, we have this one German plant which appears to have issues with high labor costs and we are going to have to do something about that. China, you grow your capacity by adding people which is relatively an inexpensive thing in China, and this new joint venture that we're doing for encapsulated glass probably gives us more growth or will give us more growth in China. The thing that my European and North American auto people are excited about is getting inquiries from the OEMs for glass and encapsulated glass in North America and Europe. So it may actually be a way we can export from China, but that is what it looks like right now.

Okay, Terry you mentioned that, you know, you might have a couple of facilities, you know one in the U.S., maybe one or two in Europe that would -- you need to make a decision on, and that is incremental to the French facility. When -- is that a '04 event or is that a '05 event and what type of cash cost do you think would be associated with closing these facilities if you'd go that route?

We are still studying the cash costs, because it's different depending on the facility and it is different on whether you close a facility or downsize a facility. We haven’t ruled anything out, but we haven't yet taken a detailed plan to the Board. Will it be an '04 event or an '05? It's more likely to be in '04 then it is -- then I don’t think we would wait till '05.

Okay and finally on GDX. When the problems first surfaced in [caught] August and you switched the management teams -- I know that you have increased your time on that business and you brought over your operations guys from aerojet including head of AFC. But is that still -- is the group running the business; is there more of a permanent replacement yet?

That's -- still the group is running the business. We're looking at whether we do a permanent replacement or not, but right now we seem to be getting the right things done and we seem to be narrowing down the focus on the issues. So we haven’t been disappointed with the performance of the management team that we've put in there, and I am spending more time with them.

Thank you

You are welcome

And once again ladies and gentlemen should you have a question please press "*" "1". And we do have a question from Tim Hasara from Kennedy Capital please go ahead.

Yes what was your cash flow in this quarter?

I don’t know what it was in the quarter; for the year the way we measure it, it was -- and the way we measure it is we take net debt the end of last year compared to net debt at the end of this year and take out the acquisition cost for ARC. And when you do that we end up with for the year about an 8 million positive cash flow, which is, obviously, an improvement over the prior year.

You don't know what it is for the fourth quarter -- your cash flow from operations?

I don’t have it here with me, and I am not in the office, so I can't answer the question.

This seems to be a pertinent piece of information?

I am more concerned about the year then I am about the quarter.

I am just trying to -- okay it's fine. And just with respect to -- when you were talking about capacities, I just want to clarify you are talking about auto capacities; is that correct?

That's correct.

And you know, auto -- I as a shareholder last couple of years have find auto to be highly disappointing and you called part of your capacity issue a victim of your success. I wonder if you could sort of explain what you mean by success there.

Yes what we have done is, you know, we've taken out -- this year I think we took somewhat in the neighborhood of 42 million of expense, and again it's left people touching the product as we manufactured; it's less scrap. In essence when you get less scrap and you need fewer people to produce, you end up with more capacities since you are producing fewer and fewer bad parts. And in part what has happened is over the last 3 years, it probably added through manufacturing changes about a $150 million of capacity alone in North America, and obviously we haven’t grown our revenues in North America. Therefore we are actually running our existing plants at a less full rate than we were 3 years ago; even though we are doing it better. That’s what I mean by that.

Okay, yeah, I mean, I wouldn't -- it doesn’t sound like success to me, but --?

Yes, it's success in taking the cost and improving the manufacturing process. It's a failure in terms of not having the revenues to plug in there -- to fill it.

And on Fine Chemicals, can you just explain the big drop in revenues in this particular quarter?

It is driven more by the mix and the revenue recognition policy that we have. What you will see for AFC is -- and it looks it's true this year -- is generally two strong quarters and two weak quarters. They seemed to have grouped together. We have relatively speaking weaker quarters in the second half of the year in '03. We expect weaker quarters in the first half of '04 and then stronger quarters in the last half, and it is all in the backlog. It is just simply here is how long it takes to make certain products and we don't recognize revenue or income until we actually ship them. So we are into right now in '04 and I expect the first half in '03 -- and the first half of '04 I expect to see smaller numbers, and the larger numbers occurring in the last half of the year.

But that was different in this last year?

Yeah, it seems to run every -- if you look at '02, it was strong; the last two quarters of the year and the first two quarters of '03, it seems to run in 12-month cycles of which half are in one fiscal year and the other half are in the other in terms of strong deliveries.

Okay. And on your Aerojet -- I mean excluding the acquisitions can you tell me what the internal growth rate was or --?

I can't give you the exact number. I think percentage wise it was around 3-4% once you factor out pension income that was received in '02.

And, you know, having been a shareholder for a couple of years, I have to say -- I am very just disappointed at the performance here. I mean the acquisitions have done nothing bad add debt, it hasn’t added shareholder value, and your debt -- your interest rate has gone up here. auto has been a disaster; Fine Chemicals, you know, this last quarter to me is a little fishy. And how will you add value by these acquisitions and how are you adding value as a company?

I think that it is a different answer in each of the segments. In terms of auto, I would certainly agree with you. It has been disappointing and it hasn’t added value. In terms of Aerojet, I think you will start seeing and should see this year the value being added; what's happened at Aerojet is it's down from being number five in essence going out of business to being number two in both liquids and solids, number one in tactical missiles, number one in in-space propulsion, and what we have been seeing is a growth in government spending for defense, which has helped us and will continue to help us. You know, I expect -- my own expectations for the Aerojet segment is over 500m of revenue in '04.

I know there has been increase in government spending, but without the acquisitions you only grew 3% -- I mean that’s fairly below the growth rate?

Well, here is the other reason that we did it, and I think you will see better growth in '04, '05, and '06. But the other reason that we did it was, that's the way we collect our environmental fee from the government as that is a surcharge on the revenue base of Aerojet. So the bigger it gets, the better our cash flows get, because we are able to collect our 88% and the less it becomes a drain on the customers because it's spread across the entire base.

I can buy that argument to a point. But you are going, you know, your debt level -- your debt-to-equity continues to grow. And at what point do you say, well we really can't afford these acquisitions and our --

I think --

Our interest coverage become suspect here?

It's obviously something, that we look at all the time, and it's really a question to should we take an action to deliver and that's something that we are thinking about.

Just curious with all, you know, corporate governance out there, is the senior management team compensated for doing an acquisition itself?

No. we are not; we are compensated based upon EPS and cash flow.

Okay. Thank you.

Sure.

And we have a question from the line of Derek Dobecki from Ironwood Capital Management. Please go ahead.

Hi, good morning.

Good morning.

Could you -- I guess, this is a slight piggyback to the previous caller's question. But could you speak about your appetite for acquisitions especially in the Aerojet space; are there good potential targets notwithstanding your balance sheet out there?

You know that would probably be the only place right now that we would consider acquisitions. And again it would be to get more and complete market share, and to make sure that our environmental is always covered. What we are seeing in that particular segment is obviously a growth in defense. And for the first time, we are looking at, at least for us, sizeable potential growth for NASA business. That’s been driven by President Bush's new directive to NASA, which says the shuttle is going to retire by 2010 and the focus is on space exploration -- both manned and unmanned. We -- only about 7% of our revenues currently are NASA. We do the small rocket engines on the shuttle -- the maneuvering engines, which we unfortunately hardly ever replace, so we don’t have a big NASA exposure to the shuttle. At the same time, if they want to do deep space exploration, we are the world's expert on what's called electric propulsion, which will be necessary -- it’s the only way to do deep space exploration right now. And obviously we are the strongest player in maneuvering or space market. But all those things help us. If both defense and NASA spending goes in that direction then we have both our largest customer bases will need our product, and so we are looking at it as a very positive thing. Still you have to play out, and we haven’t heard from NASA exactly how they are going to reprogram their money, but it looks pretty good. There is more upside than down for us.

Okay.

In terms of acquisitions, lots of left out there, there are now four players of any size, and the smallest one is Pratt & Whitney; they are now almost down to about a only a $100m, then there is Rocketdyne, which is owned by Boeing, which is about $0.5b to $600m in revenues, which is all liquids and large liquid engines as opposed to the small ones that we do. And then of course there is Alliant Tech that's about a $1.1b. Our view has been we would like to get to the point where we are one or two in proportion, and where we are sure that we are a national treasurer or a necessity to the industrial military complex as it once was called. And so, you know, should something become available, we would certainly take a look at it. Our plan would not be to deliver additionally to do so, we would sell one of our other businesses should that event occur.

Okay, great. And just on the GDX capacity. Are there any issues, i.e., unions or any other third party that will prevent consolidation or closures of facilities to occur?

In North America, and in the United States in particular, we have one plant in Canada that's doing quiet well but in the United States we have two plants that are non-union, two plants that our union. So it depends on a plant that we choose. There is no prohibition against closing; I mean it's just the costs --

Yeah.

Are different. And in Europe there are labor laws quiet strong in both France and Germany. And we are doing the French closure despite that, and our other problem seems to be in Germany, so that all have to be -- whatever we do they will have to be worked out with the Workers Council.

All right. Okay, thanks.

Our next question comes from the line of Jack Howard from Steel Partners. Please go ahead.

Hi, Terry.

Hi, Jack.

In your press release you talked about a $5m expense to settle that one of those lawsuits. Can you tell us a little bit more about that?

Yeah, it's a lawsuit with American States Water; we are currently negotiating and are pretty close to a settlement. Again it will be covered by our 88% global settlement agreement and it's -- the thing we are negotiating right now is that we added to that charge -- it was driven primarily by their request for guarantee from Aerojet on their recovery of some hook up fee. So, it may never -- we may never pay it directly, but they've asked just the guarantee to payment.

Okay. And any further news on the O1?

O1 is just still -- it’s still in appeal?

Okay.

Nothing’s happened.

And that -- at the beginning when you said what you considered segment income, is that before the corporate expense?

Yes.

Okay. And is their -- is corporate going to be 30-35m or is there anyway to bring that down in the future?

We are looking at ways to bring it down. I think you got to understand that a good portion of it -- about a third of it is driven by professional fees, lawyers dealing with all our lawsuits and accounting fees that have been driven up by the latest accounting requirements that were recently passed about last year as a result of all the scandals.

So, that's -- then the another 20 is --?

About 8 is personnel cost.

And the professional fees for the litigation, that’s reimbursed 88%?

Some of them are -- some of them yeah.

Okay. Did you comment on what size of land sales you expect in '04?

I said it will probably be less then what we did in '03.

Okay. So you still think it'd be 10-15 million there?

Yes. Probably a little better then that

And do you expect to generate free cash flow in '04?

That's our goal.

And any idea how much CAPEX will be needed in '04?

About the same at least in '03.

I didn't see that in the press release, do you know what --?

Yes I think it's in the -- let me see at the 10 again -- it's not; it was between 40-50 million.

And was a good deal of it in auto or not?

Yes, the biggest portion is auto.

Okay great, thank you

You are welcome.

The question form the line of Jim Song (ph.) from Debelli (ph.). please go ahead.

Good morning Terry.

Hi Jim.

Could you just kind of talk about the potential NASA business -- I mean how much you think in terms of -- for the products you sell -- how much you think you might be able to get and then I guess how soon you might really get there?

Well again we won't know until -- I think it's going to take them, 3-4 months to figure out exactly what they're funding and what they are not. We don’t have a lot of exposure in what they are currently funding, so it's not likely that we'll lose much, if anything, in revenues. I think the question will be at the pace. We know what they want to do; they want to continue to do robotic exploration such as the Mars mission and we did the propulsion on the Mars system. So it's really a question on how much do they want to spend, and so it's very difficult for me to give you a range. They're spending, I think, $11-12b as what the President said over the next 5 years on this program. It's clear that we are going to get some share of that, because either to do a space exploration or to do a quick replacement to the shuttle, they are primarily going to need our proportion system. So I can't hazard a guess, but it looks very good.

How soon you might think your [comps], if you get it -- if you get some of this? Is that a kind of like an '06 timeframe?

I think you will start seeing some in late '04 and probably a lot more in '05- '06, because they want a replacement starting to fly for the shuttle in '08 and that's a very aggressive time schedule.

Among your competitors, who do you think is going to be the big beneficiary of the [inaudible]?

I am sorry -- of what Jim?

Who is going to be the big beneficiary as the NASA's moon-to-mars mission?

I think in the short term it will have to be us, simply because the big competition which is Alliant Tech and Rocketdyne are both big on the shuttle and the shuttle is going to get phased out overtime. In the long run I think it's probably us and potentially Rocketdyne depending on what is the replacement for the shuttle in terms of what they're going to use to go from the moon-to-mars.

Okay. And then could you just talk about your ARC acquisition -- I know that you're telling for several months now -- were any surprises seen so far in kind of the I guess the positive upside you've done?

Actually it's gone very well so far; we still are in the process of doing the one difficult thing, which is we are moving out of one of their productions facilities in Gainesville, Virginia which will probably be done by September or October. But it seems to be on track, but that is the one caveat, it is the hardest that we are doing in terms of the integration; other than that it is doing very well. We've received very good feedback from our major customers Raytheon and Northrop and Lockheed and a lot of that seems to be driven by their desire to make sure they've got somebody who can compete with Alliant0 Tech and they are stable. And so we're seeing very good things, and putting the two together we have seen some recent awards that have helped us and it looks like two plus two will equal more than that when we get done with the integration. So we are quite pleased with it.

Great, thank you.

You are welcome.

And we have a question from the line of Paul Ross from ING Ghent. Please go ahead.

Hi Terry and good morning.

Hi Paul.

On this recent convertible that you did --

Yes.

Could you tell us what the status of the greenshoe is? And with the application of proceeds to retire some bank debt in the short run, have there been any changes in your bond covenants or your -- I mean your bank covenants and what is the prospect for compliance for those covenants given your forecast for '04?

Alright.

Three easy ones.

Three easy ones. In terms of the shoe, I believe it has now been filled.

It has been taken.

Yes.

For full 15%?

Yeah the 25m.

Great. Thank you.

I think it funds as we -- in terms of the application of proceeds, yes it was. We didn't add debt, we simply swapped debt and we have got some additional cash on the balance sheet, simply because our lenders don't want to get paid off sooner.

And covenants?

And covenants.

And bank covenants?

And bank covenants we're in compliance. We expect to continue to be in compliance. There was an amendment that was approved by the banks to ensure that we were in compliance as this permitted the convert debt to happen.

But as far as the covenants for the end of 2004, were those amended as well?

Yeah, I would have to go back and look. Right now I am told that there are -- that we have no problems with meeting the covenants.

I'll call you and ask it later in the day. Thank you very much Terry.

Sure.

Alright.

And we have a follow-up Aloe Olshin (ph.) from Deutsche Bank. Please go ahead.

Yeah Terry just regarding the ARC acquisition, can you just give us a level of cash, you know, integration, cash restructuring costs that we should expect in '04?

I think we are still looking at it but it is probably anywhere from $15-18m, and again under Government accounting rules and the LIBOR cost [inaudible] that will be primarily reimbursed by the government over a negotiated period of time usually 3-5 years.

Alright. So you would be cash out this year but recovering --?

Yes, cash will come in next year.

Okay.

A portion of it.

Alright. And just on the Fine Chemicals business, can you give us a sense of which drug therapies you see the growth? You are expecting to elevate your growth again in '04, which is really good, and which areas within Fine Chemicals will be the real growth areas this year?

Two areas. What -- last year it was the high containment area, which is primarily energetics working with, and its an HIV drug -- that one is continuing to grow, it's not growing as fast, but it's doing quite well. Where we are seeing areas of growth, we have gotten a new contract to do a cancer -- blood cancer drug that's quite a good seller. However, we are doing both chiral separation and cytotoxic, and where we see the big area in cytotoxic, and primarily in [SMP], our chiral separation -- we're predicting compounded annual growth rates in that market of somewhere in the neighborhood of 80% for chiral. And so right now what's driving our growth is we have three unique technologies that are involved either because they give you a pure compound, and/or you can do it faster and get it to market faster. And so, I think, our issue is sometime within the next 12 months we have got to make a decision as to whether we add more capacity.

Thanks Terry.

You're welcome.

And we have a follow-up from Tim Hasara from Kennedy Capital. Please go ahead.

Just to clarify. On your bank comments, were they changed other than the convertible bonds for 2004?

I believe there was a change to want to cash flow ratio, but I would have to go back and check.

Timothy Hasara I mean was there an interest cost associated with that change?

No.

Timothy Hasara Did you file anything on that change or --?

I don’t believe we've filed anything since we have done it and obviously [inaudible] which is going to come out.

Timothy Hasara Any particular reason why there isn't a financial person on this call to help answer these sorts of questions? We have to call offline and separate phone calls or --?

My CFO is out of the country right now on family emergency.

Timothy Hasara Okay.

That's why.

Timothy Hasara Thank you

And at this time there are no other questions please continue sir.

Alright. With that I thank you all for attending and we will talk to you again after our first quarter. Thank you.

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