Aerojet Rocketdyne Holdings Inc (AJRD) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the GenCorp fourth quarter and fiscal year 2004 earnings conference call. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to our host, Ms. Linda Cutler.

Welcome, everybody. I just wanted to remind you all that 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 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 fiscal year 2004 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.

With that, I'd like to turn the call over to Terry Hall.

Fiscal year 2004 was a pivotal year for GenCorp. Let me begin with a few important points to put this year into perspective. We transformed the Company into a stronger and more understandable business. We sold the under-performing GDX Automotive business, and have decided to take a buyer for the Aerojet Fine Chemicals business.

We are now able to focus on our two strongest segments with the highest return; Aerospace and Defense and Real Estate. We initiated a series of equity and debt offerings to reinforce our capital structure, reduce our debt and debt service, and put in place a new credit facility that extends our debt maturities.

These initiatives were begun in the fourth quarter and completed in the first quarter of 2005. We now have a significantly stronger balance sheet. We achieved an important goal with this financial recapitalization. We now have greater flexibility as we move to the next steps of improving this Company.

I might also add, we also dealt with the expensive and somewhat onerous requirements of Oxley-Sarbanes during the year. 2004 was very busy for us, and I think anybody would consider it quite daunting, all the tasks that we had to accomplish. We have more work to do in '05, but we're well on our way.

First, let's look at the financial results for 2004. Our CFO, Yasmin Seyal, will discuss these results with you. Then I will follow with further comments on 2004 and our focus for the future.

My remarks today on this call will focus mainly on the performance of 2004 as a full year. The fourth quarter results are included in the release that was issued this morning.

Today, GenCorp reported a net loss of $398 million, or $8.82 per share, versus net income of $22 million, or 50 cents per share in 2003. $312 million of the 2004 loss was from discontinued operations, and as many of you know, primarily resulting from the operations and sale of the GDX business.

The loss from continuing operations for 2004 was $86 million, or $1.91 per share, compared to income of $12 million, or 26 cents per share for 2003. The difference from 2000's results in terms of continuing operations is primarily due to the year-over-year increases in employee retirement benefit plan expenses, a very significant portion of which is non-cash.

Other factors that included -- contributed to this difference, include interest expense and a tax provision, which I will address later in my comments.

Looking at sales from continuing operations for 2004, sales totaled $499 million, compared to $348 million in 2003, an increase of 43 percent. The increase in sales for 2004 primarily reflects the ARC acquisition in October 2003, as well as other growth in the Company's Aerospace and Defense business, and these are partially offset by lower real estate transactions or sales in 2004, when compared to 2003.

Let's take a look next at each of the businesses separately, Aerospace and Defense and Real Estate, our core businesses, as we go forward. The performance for both of them was quite good.

Aerojet's revenues in 2004 were $492 million versus $321 million in 2003. Segment performance excluding a retirement benefit plan expense, was $57 million in 2004, versus $45 million in 2003. Again, these increases are primarily driven by the ARC acquisition, which we consider a very successful acquisition for us, and we closed that in late 2003.

The Real Estate segment reported revenues of $15 million versus $32 million in 2003. Segment performance again, was good in 2004, with $12 million versus $23 million last year. So as you can see, much of the segment performance is -- translates directly to the increase in revenues being reported too.

In 2004, Real Estate revenues and segment performance, they include our lease income, which is an ongoing item for us, and it also included two transactions. One was a property usage agreement for the Right Rail Station, finally we closed that. And second was an agreement for exclusive mining rights with aggregate on portions of our property.

Terry, in his comments to follow, will remark on the significant progress we believe we have made in 2004 on our Real Estate development plan.

I'd like to comment next, briefly, on some of the other expense items included on our results that were reported earlier today. Employee retirement benefit plan expense difficulty) was $44 million in 2004, a $45 million increase from 2003, a significant element of our 2004 results reported.

But as I mentioned before, a very significant part of this expense is non-cash. And the increase in the expense is primarily due to the actual returns of pension plan assets in prior years, and is also affected by a decrease in the discount rate from 6.5 percent to 6.25 percent in 2004. And as you know, the discount rate is used to calculate the benefit obligations.

Our Corporate expenses rose in 2004 to $38 million from $31 million in 2003. And clearly, we don't like that trend in 2004, and we are actively working on reducing that as we go forward. But the Corporate expenses' increase was primarily driven by the SOX 404 compliance requirement, amortization of the GIRD finance and costs included in our Corporate expense of about $6 million, which is a non-cash item, and a $2 million provision for environmental remediation that we recorded in the third quarter.

I think another element of our 2004 results that is definitely worthy of a comment here, is the prospective (ph) taxes for continuing operations. We recorded a tax provision of $29 million for the full year. It's important to note that this includes two elements. One of the elements is a $34 million provision for deferred tax assets.

We are required to record this because of the uncertainty associated with the realization of this asset given historical losses. The provision of $34 million was offset by a $5 million benefit recorded in the fourth quarter, primarily related to refund claims for research tax credit. As we go forward and the Company returns to profitability and returns to a taxable income position, we would expect the deferred tax asset provision to reverse into the P&L.

As you know, the 2004 results for the total Company include several items that adversely impacted performance, but are not going to impact us going forward. First, we acknowledge we incurred a loss from the sale of our GDX business. Neither Terry nor I are happy about the loss, but strategically, the divestiture was a good decision and we believe the Company is in a stronger position because of this divestiture.

Another big number you see this year is $9 million of the pre-tax expense associated with our recapitalization plan that Terry mentioned in his comments earlier on. We initiated that in the fourth quarter. The benefits of this recapitalization will be seen. They're being seen immediately. They'll be seen in 2005 and future years, as interest expense is reduced and cash flow improves by approximately $9 million on an annual basis.

We will incur another $19 million in the first quarter of 2005 that is associated with this recapitalization and will be reported in the first quarter results. I'd like to note that a fair amount of that is non-cash and relates to amortization -- relates to the write up of amortization of fees incurred in the past.

Finally, we reported the income tax provision that I talked about, which as discussed earlier, benefit we should see in the future. As I said, these events that I just talked about, affected our 2004 performance in 2004 negatively, but we do not expect these. In fact, they will cease to affect us going forward.

I think to gain a good understanding of the performance of our continuing operations and to understand the performance of this Company a little bit better from a continuing operations perspective, we need to look at the elements of our continuing operations. And in looking at that, I'd like to exclude the impact of the retirement benefit plan expense in 2004 of about $44 million.

Aerojet reported segment performance of $57 million. Real Estate reported segment performance of $12 million. This $69 million of segment performance was offset by our corporate expense of $38 million and interest expense of $35 million. So looking at continuing operations, and important elements going forward, we in fact reported a loss of $4 million.

As we go forward, the interest expense of $35 million will be reduced substantially. We've talked about that. We are also currently very focused on the reduction of our corporate expense and are in the process if implementing changes to reduce this expense as we go forward.

I'd like to turn next to talk about the elements of our recapitalization plan that we started in November of 2004, and will complete today as we redeem $53 million of the 9.5 percent senior note.

I'd like to talk about these in conjunction with the balances that you see in our balance sheet release earlier today as of November 30th, 2004, to understand the events that occurred after that date and how they affect those balances.

We closed the equity offering in November. We received net proceeds of approximately $131 million from the equity offering. These proceeds, together from the GDX sales proceeds, were used to repay senior debt after November 30th, and today will be used to redeem $53 million of the senior sub note.

The convertible subordinated debenture, we issued in total $146 million to an afforded (ph) percent, convertible sub debentures. Proceeds from that issuance were used primarily to repurchase our 5.75 convertible subordinated notes due in 2007. And the focus of that was essentially to try and reduce interest expense as we go forward and also an important element was to push out the maturity of that such that we could in fact, get a new revolver in place, a new credit facility in place, which was crucial to the Company going forward.

In December of 2004, we closed on the new $180 million credit facility, which consists of an undrawn revolver of $80 million, a term loan of $25 million, which we drew down upon, and a $75 letter of credit facility. So if you take these elements into account, and you look at the November 30th balance sheet, I'm going to go ahead and summarize what the November 30th balance sheet should look like in terms of debt.

We would have a term loan of $25 million. We'd have 9.5 percent senior sub notes of $97 million. We are left with $20 million, approximately, of the 5.75 convertible sub note, $125 million of the 4 percent contingent convertible notes remain unchanged. And the 2.25 percent convertible sub notes that we just issued total $146 million. Adding all of those together, we had total debt of $414 million.

As of November 30th, as our balance sheet showed this morning, we have cash on hand of $269 million. In the first quarter, as we repaid all of the senior debt and did the clawback, we used that cash, we used $141 million to repay senior debt and redeem the 9.5 percent for $53 million.

We increased our cash balance by $25 million, drawing down on our new term loan. If you take into account all of these balances, our cash balances, our net debt, or our debt less cash approximate what we reported as of November 30th at a little over $300 million, it's the elements that have changed.

Turning to cash flow for 2004, I know an issue near and dear to many of you, and near and dear to us too, and very important to us, certainly a focus as we go forward. Continuing operations generated cash flow of $5 million for the year, driven by positive cash flow from both Aerojet and Real Estate and offset by the corporate interest and retiree medical costs.

However, I would like to point out that in this $5 million number is reflected a $35 million benefit, mainly due to the timing of receipts and payables, and is anticipated to reverse sometime in the first quarter or the second quarter. It also includes the collection of a note receivable of $20 million for land that we sold in 2001. Discontinued operations used cash of $35 million. From a capital expenditures perspective, we spent $21 million for continuing operations and $41 million for discontinued operations.

In summary, I'd like to say I believe, with our successful recapitalization, the divestiture of GDX, a decision to sell AFC, we now have a portfolio of businesses that provide a solid basis for growth, and have a balance sheet that will enable value realization.

With that, I'd like to turn the call back to Terry for additional comments.

Since we now report in two business segments, that's the structure I'll use for my remarks. Let's talk about Aerojet first. This is our largest segment and it had an impressive year.

We had a net sales increase of 53 percent over 2003. Behind this growth was the tax distribution (ph) from the strategic acquisitions that we've made during the last two years, which expanded the depth and the diversity of our Aerospace and Defense portfolio and products, and also enhanced the opportunity for us to participate in propulsion programs that are likely to grow in the coming years.

The complimentary acquisitions included Atlantic Research Corporation, which we acquired in late 2003, giving us a large portfolio of tactical missile propulsion programs. The old ARC was a primary contributor to our revenue growth in 2004.

Also this year, in 2004, we acquired two Pratt & Whitney solid rocket programs for missile defense. They were purchased in the third quarter and as most of you probably know, Pratt & Whitney exited the solid propulsion business this year.

And finally, in 2002, we acquired a general dynamics space systems business that's located in Redmond, Washington, which significantly strengthened our in-space and satellite propulsion market positions.

In 2004, Aerojet's revenues benefited from increased deliveries, primarily on defense programs, offset by fewer than anticipated deliveries of solid rocket booster motors, which we are building for the Lockheed Martin Atlas V expendable launch vehicle.

The fourth quarter very busy and successful for Aerojet. Aerojet's engines provided the necessary propulsion for the Genesis spacecraft, another NASA Discovery mission. Aerojet has participated in every NASA Discovery mission to date. We also successfully tested a solid propellant Throttling Divert and Attitude Control System, which we call TDACS.

The test marked a major milestone for the Aegis Ballistic Missile Defense Program's Standard Missile-3. We expanded Aerojet's contract funding for the upper stage engine technology development program. We conducted a successful test program for a non-toxic reaction control engine, utilizing liquid oxygen and ethanol as propellant. This test is highly relevant to NASA's new, expanded space exploration program.

And Aerojet's engines contributed to the successful launch of a Boeing Delta 2 vehicle carrying a Navistar global positioning system military navigation satellite payload.

For the full year of 2004, we can also site numerous accomplishments. Let's talk about hypersonics first. In high-speed propulsion, we conducted the first successful variable duct flow rocket ramjet flight test for the US Navy's Supersonic Sea-Skimming Target Program. This is a program, which is intended to ultimately result in development of supersonic missiles.

We also continued DARPA's development program on HyFly hypersonic missile propulsion, with a number of ground tests, and are expecting planned flights in 2005 and 2006.

We are applying Aerojet's controllable propulsion technology, which the Company pioneered, to the Non-Line of Site, or NLOS tactical missile program. NLOS propulsion offers us the advantages of variable thrust for solid propellant, which is a technology that we have perfected and is not available to our competition.

It lowers the cost of the system. We continue to work on the successful development of this system for the Army's transformational program. We added to Aerojet's position in the solid propulsion market segment with the addition of two significant propulsion programs, Standard Missile Mark 72 and the THAD program.

On the Tomahawk Program, we signed a new five-year production contract with the prime, Raytheon, for 2,400 additional flight motors. And in space exploration, we'd like to say we were four for four in 2004 with successful programs for NASA that help to build the support for future NASA exploration with US Congress.

Aerojet's propulsion systems were instrumental on the Cassini spacecraft that penetrated the rings of Saturn. We were also on the Mars rover missions, propelling and guiding the Mars rovers Spirit and Opportunity to their destinations, and we were on the Stardust spacecraft, which rendezvoused with the Wild-2 Comet, enabling it to maneuver through jets of debris.

In addition, Aerojet's second stage engine successfully launched the Messenger spacecraft on its journey to Mercury. As an extension of our technology into the commercial marketplace, we've established a long-term relationship with Ford Motor Company to manufacture fire suppression systems for their Crown Victoria police intercept vehicle.

We began installation of production equipment at our New Mexico facility, and expect to start production this year.

Let me take a few minutes to talk about the longer-term view for our propulsion business, and what we see as important in the future and what we would suggest that our shareholders watch closely.

And what we're seeing is for the first time in probably 30 years, a large potential shift in market share in the propulsion industry.

Looking forward, there are four major drivers that will affect our business going forward. The first is the NASA Space Exploration Initiative. With President Bush's reelection, we expect to see continued support for the new space visions.

Aerojet is one of the largest propulsion system providers in the United States and is in a strong competitive position to play a very significant role in the new missions. In fact, we are currently responding to numerous requests for proposals from NASA and their prime contractors for applications ranging from the Crew Exploration Vehicle to robotic exploration, to the moon, Mars and the outer planets.

The most important development is NASA's announced intention to retire the Shuttle program and significantly expand space exploration, whether manned or unmanned, based on capsules, orbitals and robotics.

This shift will be accomplished by a gradual increase in spending over the next decade, that will result in increased revenues from multiple propulsion system opportunities. If you think about it, what NASA is doing is shifting its priority from the Shuttle and the Space Station to manned, robotic space exploration.

This unprecedented opportunity to significantly gain market share has not occurred within NASA since the Shuttle program began in the early 1970s. In fact, by our best estimate, the Shuttle and the Space Station program are more than 35 percent of the annual marketplace for propulsion in the United States. So it is a big sea (ph) change that will occur over the next five to 10 years.

The second driver that we look at is the industry consolidation. As a direct result of our acquisitions over the last two years, we are already seeing the advantage of market share gains in the solid propulsion side of our business, as the government now only has two primary solid propulsion suppliers. We should continue to expect and to see, slowly, a shift of market share in our favor in this market.

The third driver is the Defense Transformation policy. The DOD is currently assessing its mission requirements, looking to transform its capabilities to be compatible with evolving combat needs. Aerojet's propulsion systems are critical to modern tactical missile systems associated with the transformation. And even in a time of budget constraints, we expect considerable demand for our technology. Our strength in high-speed propulsion and controllable thrust systems position us well to meet the needs of the military's transformational objectives.

The fourth driver is the recovery of commercial and military satellite propulsion markets. With the growth in broadband, high definition television and other technical advances to consumers and industry, and the increasing communications and navigation requirements of the military, we expect to see more demand for our systems. This trend is already occurring. In 2004 we received orders for three satellite propulsion systems, which were delivered. In 2005, to date, we have already won contracts for 11 new systems.

Because of the diversity of our portfolio, and given the four market drivers that I've just mentioned, we believe that Aerojet is uniquely positioned to both benefit from the new opportunities and to withstand any unexpected individual program reductions or cancellations. We will continue to look for additional bolt-on or complimentary acquisitions, which would expand or compliment our production line and would expect to continue to strengthen our aerospace and defense business. We're excited about the opportunities. It will unfold over the next two, three, four, five years.

Let's turn to our Real Estate segment. On this side of the business we have to look at longer-term goals, which increase the value of the property; primarily entitlement of the property. We are in the midst of a long-term program to reclaim lands that have been left unusable, unattractive and inaccessible, because of the earlier industrial uses. Prior to us owning the property in 1954, when we acquired it, the land was used, as some of you know, for gold mine, meaning strip mining operation and since that time has been used as a rocket testing facility.

In 2004, we made significant progress towards our goal. Let's talk first about the rocks -- the rock transaction. One of the things that we have on our property are burns (ph) and burns of rocks. We've said we have a millennium supply of river rocks, resulting from the strip mining operation. This year we entered into an agreement where we gave someone exclusive rights to mine those rocks off our property. They are paying us to remove the rocks. And that is also reducing our cost to level the land in order to do development.

We, this year, also finally concluded an agreement with the regional transit authority and they are currently constructing a Light Rail station on the front of our property, within about 200 yards from where I sit right now. Again, this will promote our transit oriented development goals for our property, by putting in place a key transportation element to our property.

We also this year settled an important water dispute with the American Space Water Company, which established a comprehensive, forward thinking approach to replacement water supply needs of the area and ensured for us, most importantly, the availability of necessary water for our development.

We also expanded our Sacramento property that is in the process of being entitled, by adding an additional 1,600 acres, bringing the Company's Real Estate development projects now in the entitlement process to more than 5,800 acres, which is an area roughly about the size of the District of Columbia.

In 2005, we expect to pursue activities that will further advance our development goals. In the first half of the year we expect to see the city of Rancho Cordova issue an Environmental Impact Review for our 2,700 acre mixed use Rio Del Oro project. Towards the later part of 2005, we expect the County of Sacramento to begin the Environmental Impact Review process for our 1,400 acre Master Plan community we originally called Easton, but have now renamed Glenborough and Easton Place.

Also in 2005 we will be working with the city of Rancho Cordova towards rezoning that will permit development of our newest announced project, the 1,600 acre Westborough project, which also includes a portion of Easton Place. We hope that the city will begin the EIR process for this project in early 2006.

We are also preparing for submission in 2005, a subdivision application to the County of Sacramento. This application will seek permission for a 55-acre office park, in a joint venture with a local real estate developer. We expect approval for this application sometime in 2005.

I think, taken together, we believe 2004 was a pivotal year for GenCorp. We are today a stronger company, a more focused company than we've been in years. We continue to focus on moving forward with our Real Estate and with the continuing success of our propulsion business and we will continue to focus on shareholder value.

With that, I will open up the call for any questions you might have.

Thank you. (OPERATOR INSTRUCTIONS.) Joe Nadol, JP Morgan.

Thanks. Good morning, Terry and Yasmin. A few questions for you. Starting out on Real Estate, the EBIT that you registered in the quarter, does that consist mostly of one-time fees or are these going to be ongoing from the two deals you announced?

I think the answer is, in terms of the deals that we announced, the Light Rail is kind of a one-time deal. We are still in negotiation as to a final price. But what they did was they basically gave us the price they wanted to pay. And in California there's a process where it's determined what the final price is by, ultimately, a court if you're not able to negotiate something. We do have a little upside on it, perhaps.

In terms of the rocks, what the payment was was a one-time license fee, which as they take the rocks off the property they will pay an additional amount of money going forward. It's a 40-year kind of agreement. So, how much they take off over what period of time will fluctuate year to year. Right now they're in the process of getting all the permits that they need to do that going forward.

Okay. So essentially we should look for maybe a modest increase to what we would have expected for Real Estate EBIT in 2005, but again, pending the other things that you're working on, like the office park, et cetera.

Yes. It's not the big issue in Real Estate for us. It was a nice deal for us and obviously it saves us cost over the long run also.

Okay. Moving over for a minute to Aerojet, you noted in your press release that you're expecting slight margin pressure in '05. You came in a little lower than we had expected for the quarter, not much but in the nines pre your retirement benefit expense. Where do you expect either your segment EBIT to come in in '05 for Aerojet?

Joe, I think if we look at it in 2005, we noted that we expect some slight margin pressure going forward. Overall, if you look at it for the full year for Aerojet, we reported margins at about 11.6 percent. A significant part of our revenue or a fair amount of our revenue in 2005 does consist of the Atlas contract and currently that comes in at 0 percent profit. And that may change once we renegotiate that contract, but I think we're probably going to see some slight margin pressure on the 11.6, in 2005.

Clearly we're taking steps to try and see what we can do to alleviate that, but you're going to see a little bit of margin pressure.

Terry, the Wall Street Journal reported last week that the United Technologies is close to buying Rocketdyne from Boeing. If that in fact takes place, does that change your view on industry consolidation on the liquid side of the business?

I think is says industry consolidation on the liquid side of the business is down and we would be one of two players if that takes place. From our point of view it's good. It's the second best thing that could happen to us. The best thing, obviously, an acquisition from our own point of view at a price that was acceptable to us.

So, would you view -- you would be the smaller player in liquid, as you are currently in solid, and you have sort of an optimistic view on your market share outlook for solid. Would you say that would translate potentially into the liquid side of things as well, if (multiple speakers)?

I would say that's accurate. I would also say some of my remarks talking about the Shuttle and the replacement for the Shuttle, basically what we're seeing is NASA moving away -- or what we expect is NASA moving away from the space plane type vehicles, which use bigger engines, which is what Rocketdyne and Pratt Whitney both produce, and going to a capsule configuration, which uses smaller engines, which is primarily what we produce.

And so, I think while it's still early to say here's what's going on, I think we have a huge opportunity to get market share. As you know, Joe, we do about $5 million a year on the Shuttle. I think Pratt Whitney and Rocketdyne do almost $400 million a year on the shuttle. And they have a lot at risk. We have not much at risk and we have a lot of upside. So it's going to be really important to see what happens there.

Okay, just one more for you and I'll turn it over to someone else to ask questions. But could you give us anymore of a definitive update on the sale process of the chemicals business? Do you expect to complete that this quarter or next quarter and are there any holdups?

I wish I could tell you, but we're still in the process and we're still trying to move forward to get it sold. And that's about all I can say right now.

Ross Haberman, Haberman Fund.

How are you? Yasmin, a quick question on the corporate overhead. Could you be a little more specific? I think you said it was running about 38 million. What's your expectation for it to drop to in '05 and what are the elements that you can really control in there?

I think if you look at the corporate expense, we're a smaller company now, we're not an international company and we're in the process of implementing synergies of the smaller, more focused company, what we would like to see is a reduction in corporate expense of 40 percent, off that 38 million.

Is that 40 percent -- it would be after the Fine Chemical sales?

We are working towards getting that implemented, taking into account that the Fine Chemicals business would be sold. And again, in the 38 million you've got a certain amount of nonrecurring expenses too. For instance, the SOX 404 compliance costs and some of the other professional fees paid, or the environmental remediation expense incurred there, we would not expect to see on a recurring basis. So you've got some one-time unusual expenses in there. But looking at the 38 million as a whole, I'd like to see a reduction in that of about 40 percent.

And that you think you could achieve by the end of '05?

We are certainly working to that goal.

And just one follow-up. On the retirement benefit expenses, what's a reasonable cash expectation for that expense for '05?

I think when you look at it for '04, we incurred about 12 million, excluding the elements that are recoverable under our Aerospace and Defense business. If you look at the trend over the last couple of years that's come down fairly significantly and we're definitely working on mechanisms. We're looking at that pretty closely and we'd like to see it reduced as we go forward.

Below your $12 million cash flow?

Yes.

And just one final question, going to Real Estate. Any specific plans on new entitlement projects or joint ventures on the residential side?

I think in terms of new entitlements, right now we're going to try to get done what we have. Again, it's somewhere in the area of nine square miles of property. We will continue to work on cleaning up the rest of the property and what becomes surplus and making it available in the future.

In terms of Real Estate joint ventures, it's obviously something that we'll take a look at. Our focus has been on entitlement, but now that we're getting so close to it, have to focus again on what we do with the next step, whether that's a joint venture, whether that's a sale, whether that's development. Putting in infrastructure is something that we're going to make some decisions on this year.

Could you just give us, as a final thought, your overall assessment of the local real estate market currently, and are there any pockets of weakness, either on the residential or the commercial side which you're beginning to see?

On the residential side there is an imbalance of supply and demand. There is still more demand than there is supply. And as you probably know, the pipeline takes three-four years to fill up, or longer, because it takes so long to get entitlement here. So at least on the residential side we continue to see a very strong market, and as I understand it, we continue to see pricing that reflects the fact that demand is exceeding the supply.

In terms of commercial, it's been a different story. There really has not been much of a demand and it continues to be relatively low demand for office space. And we don't see a dramatic improvement in that and may improve over time. So right now the hot market here is residential.

Hillel Olshin, Deutsche Banc.

Good morning. Just a follow-up on a previous question regarding Fine Chemicals. Yasmin, can you just give us some color on the performance in that group? It looks like there was a negative $6 million loss from discontinued ops and I sort of want to get what happened in the fourth quarter in Fine Chemicals, as well as the full year. And I know this company, or that business, used to track at sort of a $14 to $15 million EBITDA number and I think we were below that for this year. If you can just comment on that?

If you look at the discontinued operations, the $6 million that you're looking at there, Hillel, that is mostly a provision for taxes and discontinued operations related to certain foreign liabilities. But included in the discontinued operations are certain costs associated, still, with the closure of our automotive -- one plant that we had remaining in France, the Snap-On plant and also included in there is income from AFC. We don't go into the specific elements of that in the discontinued operations. But I think I can tell you if you look at AFC, AFC is still a very very good business. It's margins are good. It has very good toss-backs and we're looking at -- nothing has changed in our view of what that EBITDA run rate for AFC should be.

But for '04 the EBITDA run rate was below that sort of $14 to $15 million range that we probably saw last year?

No, it was at that range.

Okay. So, you had I think 2 million of segment profit through the first nine-months, so we (inaudible)?

We had a strong fourth quarter.

Okay. Just moving into cash flow, Yasmin, you commented that cash flow from continuing operations was 5 million, but that was sort of after a positive $35 million swing in some working capital accounts. So stripping that out, it looks like Aerojet and Real Estate was sort of a negative 30. What is sort of your expectation for free cash flow from continuing ops in '05 and also please give us sort of CapEx guidance for '05?

I think if you -- let's take CapEx first. If you look at it for CapEx, our cost going forward and CapEx are really associated with the Aerojet and Defense business. And historically CapEx for the Aerospace and Defense business has been less than DA and that's what we would expect it to be as we go forward too. And that would put it in the range of somewhere to about 20 to 25 million.

Now if you look at Aerojet, as we've talked about, cash flow, Aerojet is still in a process of where it is using cash flow and returns to a position of generating a lot of cash flow in 2007; 2005 it gets a little healthier; 2006 it gets much better, and 2007 it is certainly at the level where we would like it to be. And as you know, we've talked about the fact that the cash flow needs in Aerojet are driven by the investments that we have made in the Atlas program and also relating to certain repayments of collections we made in earlier years.

Now, Real Estate, absent any transactions in Real Estate, absent any transaction, ignoring the Fine Chemical proceeds, essentially Aerojet has to cover the corporate expense, it has to cover the interest expense and it has to cover retiree medical costs. So I think if you were to include AFC proceeds, we were to say that cash flow for 2005 should be slightly positive. But absent the proceeds of AFC, cash flow is likely to be negative.

I would expect if you got AFC down in sort of multiples that are out there, that cash flow, after proceeds of AFC, would be more than just slightly positive.

I would hope so too.

Okay. And just one final one on sort of the following up both on the Aerojet margins. If we were to assume sort of a run rate 9 percent segment margin that you've seen based in the last two quarters, we bring that forward throughout '05, is that too much of margin pressure from the 11.5 percent range that you had for the full year in '04?

I think, Hillel, clearly, we would like to see it back up to 11 percent. Can we get it back up there? That's our objective. But at this point, I think we're going to see some slight margin pressure on the 11 percent margins that we reported, 11.6 for the full year of 2004.

Ned Davis, Tectonics (ph) Group.

Thank you. Good morning. Just a couple of things. Since you've all but given guidance for Aerojet, can you give us guidance on revenues that you expect both for the year and for the quarter that ends in about three weeks?

And Ned, as we go forward here, it's going to be our policy not to give guidance on a quarterly basis.

Okay. What about for the year on revenues?

I think what we said is we expect Aerojet to be up and then the numbers that we bandied around, absent something happening sooner than we expect on NASA, is in the 5, 6, 7 percent range net.

Okay. Switching over to the Real Estate for a moment, could you kind of give us a little more flavor of the critical path items for the major entitlements? Have your expectations on the timing changed at all from the time of the road show or before that? And is the Corp of Engineers still the critical path driver? And have you had any feedback of any challenges or problems, ecological or otherwise or local community, that bear on this that you can give us flavor on?

Okay, let me try to answer all those questions, Ned. The process in California is roughly -- and the key to the process in California is the Environmental Review Study or Impact Statement. Typically what happens in any development is you do an application, you refine the application and deal with the entitlement authority. That takes roughly a year.

They hire or they do themselves, the environmental impact review, which takes roughly another year. Then you have by law in California, public hearings and negotiations, again, which occur, which are primarily around who's paying how much for what infrastructure improvements like major roads or highway bypasses over what period of time. And you get entitlement at that time, absent someone litigating the adequacy of the Environmental Impact Review.

Where we are on each of our programs, on Rio Del Oro, which is the 2,700-acre parcel, the city of Rancho Cordova is our entitlement authority. There, we are told by the city that we will see a draft of the Environmental Review sometime in the next month or two, and thereafter it will be release publicly and then that will start what I described as the last year of public comment period. And so what we're looking at is '06 as being entitlement.

In terms of what used to be the Easton Project, now Glenborough and Easton Place, what we're told by the county is they are currently in the process of letting the contract to the consultant that's going to do the Environmental Review. And so that means the Easton Place and Glenborough project is approximately about a year behind Rio Del Oro.

Where we are on Westborough, which is about 1,600 acres, which we just filed in November, it is about a year behind Glenborough, Easton, so that's a 2008 type of project.

In terms of people being upset or dissidence or issues like that with the local communities, obviously, the city of Rancho Cordova has been a very important and excited partner in terms of getting development in their new city. And so, relationships there are very good. With the County of Sacramento, which is the entitlement authority on the east half of our property, again the relationship is very good. We did a water transaction with them earlier which solved Eastern Sacramento's water shortage. It also permitted us to make sure that we had water for our development. And again, we don't see any issues. They both seem to be supportive of what we want to do.

And in terms of environmental groups, we just haven't ran into any environmentalists who want to preserve strip mining, rocket testing sites. So, we don't see anything right now that would suggest that we're not going to meet those time schedules.

Thank you for the complete detail. Appreciate it.

Josh Shecter (ph), Steel Partners.

Hey guys. What's the revolver availability pro forma for all of the financings that you did?

Josh, in the $180 million credit facility, we had three elements to it. One is an $80 million revolver, which is undrawn. And then we have a $25 million term loan, which we drew down on. And then we have a $75 million letter of credit facility.

And what's the availability as of today?

$80 million.

And if you exclude the acquisitions in Aerojet, what was the revenue growth rate for the past year?

It was approximately 5 percent.

And is there any color you can give us as far as the sale of AFC? And maybe you can discuss, is it something you think could happen in three months, six months? I know you've been talking about it for a while.

We've been talking about it for a while and we had hoped that it would already happen, but everything seems to take longer. So, I can't tell you it's going to be three months or six months. We would like to see it in that time period.

Okay. And then just to confirm, is it your expectation that the cash retirement expense for '05 will be less than $12 million?

We'd like it to be and we're certainly working towards that. But can I tell you if it's going to be that? No. I mean, we certainly reduced retiree medical expense significantly if you look at the trend over the last few years and I think that's what you need to focus on.

As you know, Josh, what we have is a capped program with these retirees, and obviously as medical expenses go up, the amount they have to pay in goes up. And so given that and given what Congress did with retiree medical, there's economic incentive for people to drop out of the program. It's just hard to forecast how fast that occurs, at least we can't get our actuaries to give us numbers reflecting of that.

And one final question. Just with respect to Aerojet margins, do you think that they will be below 10 percent for year? I know you talked about erosion of margins.

They better not be.

David Lorver (ph), Pirate Capital.

You made mention of the potential approval of an office park in 2005. Is that also a potential revenue contributor? And then also are there any other potential revenue contributors coming from the real estate segment that we've not discussed?

In terms of the office park, it's in the early parts of development, so I wouldn't expect that it will contribute revenues, just given the market. Other than that we don't have anything planned, as I said earlier. We're looking at whether we want to do, or partner with somebody to do further development going forward. And we'll see whether that makes sense or not, this year. But is there one that we will absolutely do? No. It's going to depend on the economics, David.

And on the sale of AFC, can you just provide more detail as to what's holding up the process?

I think you have to understand that AFC property itself is here on the site. It's part of the Super Fund site and so most of the delays have been related to environmental, which we're slowly working through.

And in the past these delays have been overcome and we can still expect the sale of AFC sometime. However, we just don't have a clear date as to --?

We intend to sell AFC, yes.

Mike Barone, Akila (ph) Capital.

Hi. Can you give us the status of your pension plan? I understand it's over-funded. I just wanted to see if you could give a dollar amount on that?

Yes, when you look at our pension plan in total, we're looking on a PBO basis of being over-funded by approximately 19 million or 20 million. And if you look at it on an ABO basis it's going to be a little bit more than that.

Solomon Komaladine (ph), B. Reilly & Company.

What sort of contribution do you expect from the Ford deal going forward? Do you expect a lump sum payment upon completion of the assembly line or do you expect a stream of revenue in FY '05 from that?

We expect a stream of revenue. We will be selling them the system, which is basically intended to suppress -- as you probably know, Crown Victoria police cars have had a history of having fires when they have high-speed rear end collisions. So we will be producing that product for Ford and delivering it to them and we expect a margin that's equivalent to our defense margin.

Okay, great. I get a pro form interest expense of around 4.5 million in FY '05 once you're done retiring the 5.75 convert. Is that in the right ballpark?

On the savings associated with the convert, yes.

Okay, so 4.5 million in interest expense per quarter?

Yes, that's probably -- it's pretty simple math to do, because if you look at all of our instruments and all of our debt, it's pretty straightforward to do it. It's probably in the ballpark.

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