Aerojet Rocketdyne Holdings Inc (AJRD) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Gencorp second-quarter 2004 earnings call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host -- Ms. Linda Cutler. Please go ahead.

Thank you, Irma. During this conference 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 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 second-quarter 2004 range release as well as management's discussions 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, and welcome, everybody. Thank you for joining us today. With me is Yasmin Seyal, who is our Senior Vice President and Chief Financial Officer. Let me begin by noting that I understand the inconvenience to you that we may have caused by changing the date and time of our call. We in management have definitely listened to our many shareholders who told us they feel that GDX was no longer a positive to Gencorp; and in our efforts to try to divest that business we wanted to allow as much time as possible so that we could enable -- tell you about an agreement on the sale. Unfortunately I must say that as of this time we're still in negotiations.

There is not anything that I can tell you at this time and as soon as those negotiations conclude, one way or the other, we will let you know the results.

Before we go into the details of the numbers, I do want to address some of the issues that relate to GDX and our plans to transform this Company and to change our portfolio.

As we have described to you, repeatedly, the challenges of the market environment of GDX had become so great that we are convinced it needs to go into different ownership. Probably where a private owner can take the strong restructuring actions that are necessary to bring the business to profitability. Many of the market forces working against us most especially increased market cost are material costs, large capital requirements and high development startup costs on new platforms. Our problems that you see in other areas in the economy but in the auto OEM market which is famous for its pricing concessions they're particularly onerous to our cash flow needs. We are convinced this business is best served with another owner that can focus its efforts on the essential restructuring it needs.

As I said, we're currently in negotiations so there is not a whole lot I continue at this moment about the GDX sale process. And we will inform you as soon as we can. We have as we noted in an earlier press release taken a onetime non-cash charge of 261 million when we reclassified the business. Many details are in that release and I will not go through them individually here although I will be happy to take your questions at the conclusion of my remarks.

Additionally, I am sure you are aware that we are looking at various strategic alternatives for our Aerojet Fine Chemicals segment.

There is no timetable for whatever action we might decide to take regarding AFC because it is in fact a very healthy business. We are therefore down to three operating segments in our reporting earnings for this quarter. Our reported sales of 136 million in the second quarter of 2004 increased from 101 million, or 35 percent over the same period a year ago. This was primarily reflecting the importance in the contribution from the ARC propulsion business that we acquired at the end of last year. We are well along in the successful integration of this business and to our existing Aerojet operations as evidenced by the steady increase in performance by this segment.

Of course, given the classification of GDX Automotive as discontinued operation my (indiscernible) on this call will exclude numbers and effects from GDX with a few exceptions that I will make clear as I go along.

Our net loss of $312 million or $7.06 per share for the second quarter compared to net income of 10 million or 21 cents per share for the second quarter of 2003 is a direct result of the $261 million charge as well as the impact of an increase in non-cash pension expense that was not present a year ago. Higher interest expense and some tax provisions. Together, these total 13 million.

As I mentioned last quarter, non-cash pension charges will affect us each of the quarters of this year and we have -- through the first half of the year add 26 million in non-cash charges. That's despite the fact that our pension plan is currently overfunded by something in excess of $100 million. This charge is an accounting issue resulting from the market performance of the last three years.

When we look at our businesses, Aerojet continues to perform very well. Sales rose to 125 million compared to 82 million a year ago, primarily, as a result of the sales contribution that we gained from the ARC acquisition. There is a 52 percent increase -- that is a 52 percent increase year over year. We are also noticing the business is picking up in this segment. There is much more proposal activity going on than has occurred the last several years.

Segment performance excluding pension plan expenses, corporate income and expenses and income tax provisions was 8 million for the quarter.

Our ARC acquisition is almost fully integrated with the exception of 1 remaining goal if we plan to close their Gainesville plant and take some additional related restructuring charges. We are well along in the process which will cost us up to $15 to $20 million from this year's cash flow. However we expect to recover 80 to 90 percent of those sums over the next few years from the federal government because they, too, benefit from the cost savings that are most delivered to their program.

Consistent with our goal to grow Aerojet, last month, we successfully acquired two key solid rocket motor programs from Pratt & Whitney. Pratt & Whitney has announced that they are getting out of the solid rocket motor business. The two programs we acquired are bedrock programs to our nation's national defense programs. The first includes the flight booster motors for the Terminal High Altitude Area Defense or THAAD missile program. And it's currently in its development phase through Lockheed Martin. The second program involves production of Raytheon's Mk-72 booster, which also is being transferred to Aerojet. The Mk-72 provides the first stage propulsion for standard missile 3 which is the sea-based component of the Aegis Ballistic Missile Defense System.

Both these acquisitions closed in June for a total price of less than $5 million. These are important to us because it appears that both programs will be in either their current or a derived form -- derivative form for many years to come. Winning these programs from Pratt & Whitney should and will help strengthen and expand our aerospace and defense portfolio.

In addition, with Pratt & Whitney, access being the solid propulsion market, we anticipate that additional opportunities will come our way as now we only have one other competitor in this market.

Again talk about Aerojet we still had no word from NASA on what their knew Man to the Moon-to-Mars is going to entail. With this being an election year I did not expect to see much action or much clarification from NASA until 2005, when senior civilian appointees are in place.

If President Bush is reelected we expect the NASA Missile Defense programs will continue to stay the same. If Sen. Kerry is elected missile defense will continue but we will undoubtedly see a somewhat different install.

We do continue to expect NASA to redirect its funding towards going back to the deep space exploration and hopefully going to Mars as President Bush outlined earlier this year. But as I said it is far too early to tell what exactly is going to happen, given the politics that are surrounding this election.

In terms of our Real Estate sector we continue to work on the long-term effort of gaining the entitlement that are necessary for the development of our first 5000 acres. There were no sales in this quarter, just additional leasing activities. Because we do intend to hold land until we have entitlement because we received much greater profits at that time. By the end of the calendar year, we expect to have over 5000 acres in the entitlement process. And we will try to move as rapidly as we can, along with the zoning authorities, to try to get this property rezoned.

During the second quarter, we rented an additional 54,000 square feet to an existing tenant and extended their lease for another 2 1/2 years. That tenant now leases 250,000 feet from us in the Aerojet facility. It's our office facilities that are no longer needed by Aerojet. We do appear to offer a very strong commercial location with good access to our freeway system and easy travel from all levels.

So our leasing activity right now is not just a example of us increasing our profitability. It also is proof of the viability and the desirability of development on our property.

By late this fall, we also expect to close on the sale of land on a light rail station site. The light rail is currently being constructed across the front of -- or the top of our business, the north end of our business and will go into service area early next year all the way to downtown Sacramento.

In terms of our Fine Chemicals segment, it's doing well. Sales were 13 million compared to 17 million for the second quarter of 2003. But the decrease really reflects the timing of the orders and deliveries. As you know, we don't book our deliveries until usually 30 days after delivery. We fully expect this segment to run at full capacity for the remainder of our fiscal year. And as I told you in the past, we expect their performance to at least meet if not exceed last year's performance which was $8 million in profitability.

One of the issues that obviously is important to us is our cash flow. In the second quarter, we used cash, net cash of $7 million in our business. Those expenditures were driven by defense spending primarily on Atlas and Titan programs. By environmental spending that we spent prior to the reimbursement which we'll get later this year from the government. In addition, GDX, although a discontinued operation, is still a user of cash for its tooling and development needs and will continue to be so at least through the third quarter or whenever we've divested of the business.

By the fourth quarter of this year, we expect to turn cash positive. In that quarter, we are anticipating a fairly sizable payment on the Atlas program and we'll have -- assuming that we continue to own GDX, which may or may not be a valid assumption, we expect to have zero GDX expenditures.

I think in short, to finish up, before we take questions 2004 continues to be a year of change and a year of challenge for us. We believe that the transformation the Company is going through will provide better returns to the shareholders. We are building on the opportunities that we see in the defense market. And our position now is one of the major propulsion houses in the United States.

We will continue to our exploration of our strategic alternatives on Fine Chemicals and obviously we're taking steps that will stop the bleeding that we've seen from GDX. We continue to make the progress on our Real Estate business and get closer and closer to realization of the huge value that we see there. We will remain focused on our aerospace and defense opportunities and how we can accelerate and realize the value from Real Estate. Thank you for listening and now I would be willing to take any questions that you might have.

(OPERATOR INSTRUCTIONS) Vali (ph) Ulsheen from Deutsche Banc.

Good afternoon.

Terry, can you just give us a sense what -- obviously we were scheduled for the call on Monday. Maybe, just give us a sense in terms of maybe what has gone on over the last few days and I understand and appreciate you can't go too much into detail regarding the possible sale of GDX. Maybe just discuss what has gone on the past few days?

All I can really tell you is that we continue to negotiate. My lawyers are shaking their heads at me. So I would like to tell you more but I can't just yet.

Okay. Regarding Aerojet I guess if you sort of add back the pension, the non-cash pension expense to the segment profit you're running six months into the fiscal year probably about a 10 percent segment margin which is below sort of what you've been running in the past. Obviously you're integrating in ARC. Can you maybe give us a sense of when we could see some further margin improvement in that segment or maybe just give us a sense of what you think aerospace segment margin will be for the full year?

I think it's going to be around 10 percent for the full year. What we are experiencing is, in part integration of ARC; and in part portfolios changed a little with some of the Aeroship sea business having slightly lower margins than what we've had historically in the Aerojet business. Having said that they are on fairly long-term and strong missile programs. So you -- we have foreseeability. And we have certain consistency that we didn't have in some of the R&D (inaudible) most of ARC's business (indiscernible) production appears very long-lived programs there.

And regarding ARC you mentioned about 15 to 20 million of cash restructuring for the year. What, where are we in terms of the cash restructuring today? How much of that has gone out the door yet?

Not a lot has gone out the door. We'll see most of it Q3.

Q3 we will see the bulk of it. Okay. And also maybe Yasmin could comment. Can you remind us sort of in terms of the working capital, maybe the seasonality of working capital, which quarters may be our big users or big sources of cash in terms of working cap?

Probably going to see a use of working capital in the third quarter as compared to our second quarter. Third quarter is going to be driven by continuing expenditures at GDX. Probably one of the biggest drivers is you'll see some cash going out in the third quarter in connection with the closure of the (technical difficulty) no earlier or late last year November of last year. So both are probably going to be back together with the use of cash in the C structuring probably going to (indiscernible).

Historically it's been Q1 and Q3 and that's been driven a lot by GDX. That may change somewhat as that asset leaves the portfolio.

What about -- let ask a question on Q2, historically, a source of cash from working cap. Is that the case in this year's second quarter?

In this year's second quarter, the net, net operations and investments and capital expenditures net, net we were a user of cash to the tune of about $7 million.

And I think CapEx was 5 in the quarter?

CapEx was continuing operations for 5 discontinued operations which includes GDX, had about another 13 million or so in CapEx. So in total we were a user of cash in CapEx which was about $18 million.

James Kringle (ph) Giovanni Capital Group.

Jared (ph) Stevens from Giovanni Capital. Could you quickly run through the results for GDX for the quarter?

Right now, the results of GDX for the quarter are shown in discontinued operations. They are looking at a loss as an operating perspective are looking at a loss from GDX.

Right but can you talk about the trends in the business at all in terms of the topline? As well as the profit line?

GDX for the quarter ran at a loss from an operational standpoint. The loss was about $3 million.

Okay, did the topline get any worse, though? Without going into any details in terms of the (indiscernible)?

No.

And in terms of your overfunded pension how much of that would go with GDX?

We can't talk about those points.

Bradley Caine (ph) with Seneca Capital Management.

Terry, can you talk a little bit away from the arc business how the aerospace was doing? It looks like for the quarter was only up on a comparable basis about $1 million?

What we're seeing is -- you're right in the numbers. What we're seeing, though, is more request for proposals from our customers and there's some timing issues primarily driven by Atlas deliveries, where we did a lot of work on (indiscernible) in the quarter but you won't see any reflection of revenues because we haven't delivered the motors yet. So I think when we -- if we look at it, we are expecting somewhere between 5 to 9 percent kind of organic growth in the business this year.

I guess what might be helpful in future releases maybe just mentioning how many deliveries you did this quarter versus last year, same quarter.

Yes we would be happy to to you every quarter we delivered a lot of the Atlas motors but most of the deliveries will take place in Q3 and in Q4 this year. I think we're talking 6 or more.

Ross Haberman (ph) from Abram and Funds (ph).

I was wondering if you could give us sort of a rough outline over the next, say, 2 to 3 years? How do you envision the pace of development on some of the Real Estate?

That's an interesting question. What we're currently in process we have two projects and we are going to file an application for a third project sometime this fall. Two projects that are currently filed are a project called Rio del Oro, which is approximately 2700 acres, and a project called Easton, which is approximately 1400 acres. Rio del Oro has been filed for some time and they are currently doing a environmental review statement. That basically will take somewhere between 9 months, 6 to 12 months. At which time, the zoning authority which, in that case, is the new city of Rancho Cordova will basically decide what they're going to do in terms of zoning and restrictions dealing with the uses and dealing with perhaps endangered species. That kind of thing.

We expect somewhere between 2006 and 2007 that that will be entitled and ready to go. The Easton project we just filed in January so it is about a year behind that project so that's 2007/2008 and then the new project which we haven't named yet but we all internally refer to it as West Borough (ph) because it's West of Easton. It's probably 48 months or so away. In the meantime we will do some small divestitures. An example is this slide rail station that we're going to sell some land for. There may be some more, smaller parcels -- 10 acres 20 acres -- that we will do in the short term and then we're still dealing with the issue of what do we do in terms of structuring to defer.

The tax given that we have no basis on the property. That might result in us doing a transaction somewhat earlier than the time levels that I've given you.

Just in -- as you brought up the tax, I -- are you currently paying any taxes at the moment besides the book end entries which I saw this quarter or so?

We paid taxes in certain foreign jurisdictions. Other than that we are not in a taxpaying position.

Given whatever you end up, selling the auto business for and taking the write-down, how -- give us a range of how big your (indiscernible) could be after that sale?

Its state would be sizable. And the one thing that's interesting to us is that that is something that we could use to help as we sell any of the property.

Tim Hascera from Kennedy Capital.

Just a question on cash flow. Do you anticipate being cash flow positive for the year? I understand you'll be cash flow negative at least the first three quarters of this fiscal year?

Right now we don't anticipate being cash flow positive for the year, Tim.

And with respect to the write-down and what the last question (indiscernible) net operating losses, is there a probability that you'll have capital losses on the auto sale, rather than net loss carryforwards that could be offset against Real Estate capital gains?

Yes. That is definitely a possibility.

Would that change your strategy or your time frame on the real estate strategy?

There is a possibility.

It would accelerate.

Just with this negative cash flow can you explain to be how much is restructuring charges and how much it is -- I am just a little concerned from having a negative cash flow from operations here.

What we've announced there's been two restructuring actions. One is Snappon, which is the French plant. And that's somewhere between $10 and $15 million. And the other restructuring is the Gainesville plant shutdown which the government will alternately pay for but which we will finance for them which is between $15 and $20 million. So those are the restructuring costs.

So it's 25 to 40 million -- I mean if you took those out would you be cash flow positive?

Not with GDX no.

Will you breaking down in your 10-Q the revenues of your discontinued operations?

No.

Why won't you be doing that? You know, you're a public company. This is -- it's still an operation of the Company. Why won't you disclose what --?

In terms of the actual discontinued operations we will be showing you the sales through the three months ended and actually the six months ended with the breakdown of (indiscernible) discontinues, those are things (indiscernible).

Operating results.

Saul Minya (ph) from SM Investors.

What's the book value of GDX after the write-down?

At this point in time we -- what you see in the balance sheet reflected in the assets held for a sale and liabilities held for sales. The assets of discontinued operations as of May 31 are shown to be 319 million. And the liabilities associated with discontinued operations are shown to be 154 million.

Just subtract them? Hello?

Yes.

Yes.

Not very long ago, regarding GDX, you were saying that you thought that it was just better to turn it around first and give it some time, several quarters a year. Whatever was necessary to turn it. And what's changed in GDX or your thinking?

Actually what I think what we said was we were trying to decide whether we wanted to spend our capital to fix it or to get out. I think what we've seen in the marketplace is a weakening OEM market in terms of a number of builds. Also what happens then is our OEM customers have a tendency to come back and want unscheduled price reductions so the market place plus material costs have gone up. So we're getting squeezed by our suppliers who provide us with raw material and we're getting squeezed by our customers who want to pay us less when things are costing more.

(technical difficulty)

Just a moment. Next question comes from the line of Randy Gulke from Musinic.

My question has actually been answered. Thank you.

Richard Grimje (ph) from IMG.

Hi Terry. Can we expect your current 3 cents a quarter dividend policy to be sustained going forward?

It's something that we're going to have to discuss with the board. We have a board meeting tomorrow so I don't have an answer for you right now.

Under your current bank or your covenant package are you restricted from buying back stock at this time?

Yes we are.

So, can we assume that the $261 million charge from GDX to go against their restricted payment test under your bond debenture?

Yes to both.

Tom Wheatland from Lakeway Capital.

Hi I just want to follow-up on -- you have written that book value down now I guess to 165 million. Is that supposed to be reflective of what you think you would net from the sale? Is that your best guess now or is that --?

That's what we believe the value of the assets are now.

So your tax basis on that is say, a fair amount higher?

Yes.

So, is it in line with sort of the old book value or was there a disconnect there?

We can't comment on the particulars of the GDX transaction at this point.

If you do, if and when this transaction is finished, I assume there's still some sort of expenses related to running GDX that are coming out of the G&A line and the corporate overhead. Is there any way you could quantify some of that or did that all get sort of separated out into the discontinued?

We don't allocate to our units. There will be obviously be some economies off scale as we get smaller. But we don't have a number yet to give you.

Saul Minya, SM Investors.

A little more detail on Fine Chemicals in the quarter, just how the quarter relates to the year and the order flow and the backlog and just, like, I guess you're still running up against capacity and --?

Here's what we're seeing in Fine Chemicals. One, the way we report we recognize revenues is a little misleading, in terms of how much did they do during the quarter. We don't deliver it and in most cases the customer has 30 days after delivery before there's final acceptance. We don' book the revenues and we don't book the profit. We have many more deliveries occurring in the third and fourth quarters so you'll see much more booking. In terms of the backlog to fluctuate up-and-down depending on whether they've signed a contract with customer for a 2- or 3-year supply. They're currently I believe negotiating one which looks like it will be signed sometime in the next quarter. In terms of how busy the plant is, they are full. In fact, we have been turning away lower margin business and we expect them to be full as far out as we can forecast right now which is through the end of this year.

Does that mean -- you basically said there's no real timetable on making a decision on the business but in the past you've indicated you wanted it to grow before selling it as well. If you don't make a decision, next year will be flat year-to-year just on capacity alone?

No, we have the ability probably to get a little more in there. Quite frankly, given what they look like in the near future you would think it might be more valuable to do something sooner rather than later.

Why is that?

Because they're full up and you're going to see the benefit of that over the next 3 or 4 quarters, so they will have even a higher margin going forward than they had last year.

How much pricing do they have?

How much pricing power?

Yes.

In some cases they're sole source and other cases they're one of two suppliers but the demand for the product is such that there's not a lot of capacity right now to go out to somebody else and get it. You wouldn't qualify a new supplier just because it's quite expensive.

Just one more question about Aerojet. In the quarter just ARC there is not much growth really in the topline. Maybe you could just talk about the outlook there?

Yes that's in part as I said before an issue of timing where we're making the Atlas Motors. And we're not -- when we delivered them we recognized the revenue also. What I said is we expect somewhere between 5 to 9 percent organic growth excluding ARC for this year.

Andy Green, Wachovia Securities.

This -- Terry, your outlook for ARC, the 5 to 9 percent organic growth and in the -- or I'm sorry for Aerojet and the contract backlog of 876 million, does that -- first of all, does that reflect any of the business for THAAD and Mark 72 that you acquired from Pratt or is that upside to the reported number?

I think some of it's in. Not all of it but some of it was in because we had already been subcontracted to do most of the work or to do a good substantial proportion but not all of it is my understanding.

Can you say how much difference that particular piece of business makes, compared to the original plan?

I think 10 to 20 million annually.

And then one other quick question, again, related to Aerojet. Earlier this year the government decided to start funneling more money to military satellite launch work through Boeing and Lockheed. And I was wondering if, again, if that backlog reflects any of that additional revenue? Or if your organic growth rate reflects any of that?

That's a good question, too. What the government said is, they expect pricing to increase on ELV, Expendable Launch Vehicle which is our Atlas 5 which is Lockheed and Delta 4 which is Boeing, by 50 percent. The primes Boeing and Lockheed are currently negotiating that with the government and we expect that negotiation to take a year. And then they will pass through to us what we're going to get. What it means for us is we expect pricing increases -- none of it's in the backlog.

(OPERATOR INSTRUCTIONS) Andrew Wetmore from NSW Assets.

Clearly it's not in the cards right now for another acquisition in the Aerospace but as you look down the road and the balance sheet clears up is there something you would consider?

Yes, if it was the right deal we would consider it and it would, again, I think impact our decision on the AFC business also. Because, again, we would -- our goal is to get bigger in Aerospace and Defense given we have a fairly nice platform on which to grow.

And how far down the road do you think it is before you can look at something like that?

Soon, I hope.

Mr. Hall, there are no further questions at this time. Please continue.

All right. Thank you all for dialing in on our call and we'll talk to again in about three months. Thank you.

Ladies and gentlemen, this conference will be available for replay after today at 5 PM till midnight July 25th. You may access the replay service by dialing 1-800-475-6701 and entering the access code of 738980. International participants may dial 1-320-365-3844. [Operator Instructions] This does conclude our conference for today. Thank you for using AT&T Teleconferencing. You may now disconnect.