Aerojet Rocketdyne Holdings Inc (AJRD) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the GenCorp first quarter 2005 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. Should you require assistance at any time during today's conference please press the star followed by the zero on your touchtone phone. As a reminder today's conference is being recorded Thursday, March 31, 2005. I would now like to turn the conference over to our host, Linda Cutler. Please go ahead.

Thank you, Anthony, and thank you everyone. 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 first quarter 2005 earnings release as well as management's discussion and analysis and elsewhere in our most recent Form 10K and other filings with the SEC. These statements in 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'd like to turn the call over to Terry Hall.

Thank you Linda, and good morning. Two years ago we made the decision to refocus GenCorp on its two core businesses, aerospace and defense and real estate. Last year we made a fair amount of progress in putting these changes into effect. We sold our GDX Automotive business, we put our ASC business up for sale and made it a discontinued operation and we restructured our balance sheet. We concluded the financial transactions to restructure our balance sheet at the beginning of this quarter and it has some impact on us, both in terms of cost, cash flow and in terms of EPS. We still need to conclude a successful sale of our ASC unit, our chemical unit, and we continue to work toward that end. Our two core businesses both have tremendous potential to create additional value.

Aerojet is positioned in it's market and we expect it to achieve market share growth in the missile and rocked propulsion market. Aerojet products are essential to the defense of the United States and to its continued exploration of space. Being a key supplier to the Department of Defense and NASA should assure that Aerojet continues to deliver strong revenues and increasing margin performance.

Real estate has a very bright future. We continue to march towards entitlement of the 9 square miles of projects currently in progress and expect to achieve the first entitlement on Rio Del Oro next year. We remain on track to achieve our real estate objectives. I will give you more color on our operations later in this call, but first let's have Yasmin, our CFO discuss our financial results with you.

Good morning and thank you, Terry. The details of the first quarter financials are available in the release that we issued this morning, so my comments on this call are going to focus on looking at the financial performance of our ongoing operations and also comment a little bit on cash flow. Today GenCorp reported a net loss for the first quarter of 29 million or $.54 per share, as compared to a net loss of 19 million or $.43 per share in 2004. What I'd like to do is to break-- as I go though this call is to break down these numbers to provide some additional understanding. First, 28 million of the 2005 net loss, as you can see in the release, is from continuing operations and 1 million from discontinued operations compared to the 9 million of net loss of continuing operations and 10 million from disc. ops [ph] in 2004. The 2005 net loss from continuing operations includes an 18 million charge related to our re-capitalization effort, which we completed in the first quarter of 2004. It includes the write-off of the deferred financing fee and premiums associated with the retired debt. As you may recall, we talked about this charge in the last call and at that point in time were estimating it to be about 19 million, so in actuality it came in a little bit lower. An important point to note also is that in the 2004 net loss from continuing operations and comparing period-over-period is that the 9 million included a tax benefit of 6 million on the loss. In 2005 we recorded no tax benefit on the loss and I'll comment on that a little bit further in my comments.

Retirement benefit plan expense included in the continuing operations for the quarter, which is again almost totally non-cash, was 12 million in both 2005 and 2004. When we look at our continuing operations performance I think you need to exclude two non-operational expenses, the re-capitalization charge and the retirement benefits expense, so excluding those two you would see that we actually earned operational income of 2 million. This compares to a loss of 3 million in 2004 if you exclude the tax benefit recorded as well, indicating a period-over-period improvement of 5 million. The drivers of the improvement are our additional income from the aerospace and defense business, period-over-period they generated $2 million more in income. Our corporate expense is lower and our interest expense is lower as well. Looking at our sales from continuing operations, we generated 142 million in sales in the first quarter of 2005, compared to 110 million in 2004 with Aerojet driving the 29% increase.

Looking at the continuing operations in a little more detail and looking at the business trends, we see them to be very encouraging as Terry alluded to in his comments earlier on. Looking at Aerojet by itself, sales were 140 million in the first quarter of 2005, compared to 113 million in 2004, a 24% increase. Segment performance for Aerojet excluding retirement benefit plan expense was 13 million in 2004 [indiscernible], compared to 11 million in 2004, an 18% increase. I would like to add the comment here though that segment performance is a non-GAAP measure and I think it's defined in the release. Segment performance excluding retirement benefit expense for Aerojet and expressed as a percentage of sales was 9.3% in 2005, compared to 9.7 in 2004. This slight decline is primarily due to changes in our program sales mix, as we turn more to R&D contracts in 2005 and is influenced to a big extent by the sales recorded on the Atlas V program, for which we are recording no profit currently. Our other core operation real estate did not have any sale of assets in either of the periods. It's segment performance was 1 million in both first quarter of 2005 and 2004 and reflects the ongoing leasing activities there.

Corporate expense, we reported 5 million in expense in the first quarter 2005 compared to 7 million in 2004. Included in this decrease is $1 million of lower amortization costs associated with our financing cost. Interest expense has declined 7 million in the first quarter of 2005 from 8 million in 2004. Again, this reflects the improved current interest rate structure of our debt as a result of the re-capitalization and we expect to see the benefits of this as we go further into 2005.

We didn't record any tax benefit associated with the loss in the first quarter of 2005. As we've commented before this is because of the uncertainty associated with realizing any such benefits in the future given our historical losses. As we go forward though and the Company returns to profitability on a tax basis and returns to a taxable income position, we expect to realize such benefits and utilize them to offset tax benefits in the future.

I think the next important issue that we've got to talk about here is cash flow and our use of cash flow in the first quarter. Our total debt less cash increased from 308 million at the end of the year to 384 million at the end of first quarter, using cash of 76 million. As I mentioned in our last call our fourth quarter 2004 numbers included approximately a $35 million benefit that was due to the timing of receipts and payables and that a good part of this would reverse in the first quarter. A substantial part of that did reverse in the first quarter of this year. In addition, we built some inventory as primarily as a result of the Atlas V program as Aerojet builds inventory to support the delivery schedule on the Atlas program for the rest of the year. In the first quarter we delivered motors on the Atlas unit and are scheduled to deliver somewhere between 7 to 9 motors in the later part of this year on the Atlas program.

Cash interest payments for the first quarter were 13 million, associated with the schedule on our debt and we also incurred capital expenditures of $9 million. 2 million of those were incurred in connection with our continuing operations Aerojet and 7 million were incurred in connection with our Fine Chemicals business and we also incurred $15 million in cash costs associated with our re-capitalization effort.

The cash usage for the first quarter was significant and certainly included the impact of non-recurring items, but I think I'd like to address what we think the remainder of the year looks like. Excluding the net proceeds from the sale of the Fine Chemicals business and absent any real estate transaction, we expect to use additional cash somewhere in the range of $20 to $35 million over the remaining three quarters of this year. This expectation is driven by corporate expenses and other expenses, such as, our legacy retiree medical payments, cash interest payments and capital investments. We expect to see Aerojet's cash flow performance improve over the remainder of the year and that has been factored into the range that we've presented. Aerojet's goal is to be cash flow neutral for the year and, as we've talked about in the past, Aerojet's cash flow has been driven by investments we've made in Atlas programs and certain program repayments for collections that we've received in the prior years. In addition, we've incurred and are currently incurring restructuring costs associated with our ARC acquisition that we expect to be reimbursed for by the Government over a 5-year period.

The 2006 cash flow picture is much better as we've talked about before as we expect Aerojet's revenue base to continue to show healthy growth and many of the factors that we have negatively impacted its cash performance will be substantially resolved and behind them in 2006. We believe in 2007 Aerojet's cash flow will be at the level we would like it to be, which is roughly equal to their EBIT and their cash position is such that it can sustain the rest of the Company's cash flow requirements as we go forward.

To complete my comments I'd like to comment on the AFC transaction. As you know we're actively pursing the divestiture of the Fine Chemicals business. I'd like to be able to comment more on the timing of this transaction but where we are given in the process, I'm not able to do that at this point in time and we will provide you comments as soon as we possibly can. Until we dispose this business we will continue to operate it and continue to assure that its value is maintained in the normal course of business. Proceeds from the AFC when it is completed will obviously have a very positive impact on our debt and liquidity positions and we are working toward completing that transaction. With that I'd like to turn the call back to Terry for additional comments.

Thank you Yasmin. I'm going to talk about what we see the businesses doing and let's talk about Aerojet first. Aerojet we saw in the first quarter stronger revenues than what we projected. As Yasmin told you were up 24% year-over-year. In our last call I told you that there were four key drivers for Aerojet's growth; the NASA space exploration initiative to replace the shuttle, industry consolidation in propulsion, the defense transformation policy, and recovery of the satellite marketplace. When we talk about NASA we are seeing an extremely strong proposal requirements or proposal activity driven by the NASA Space Exploration Initiative. NASA has started a process to develop the manned replacement for the shuttle and they've basically selected two teams, a Boeing team and a Lockheed Martin team, to compete for the replacement and they've given each of those teams somewhere in the neighborhood in of $1 billion each to engineer and develop a prototype for what they call the crew exploration vehicle, which is a capsule like vehicle, which will go on top of a launch vehicle, probably Atlas V or Delta 4. Both teams have asked us for numerous number of proposals and we're in the process of doing that. Obviously going to an Apollo like or capsule like vehicle plays to Aerojet's strengths. We are the leader in space maneuvering, propulsion, lander [ph] propulsion and it should result in Aerojet dramatically increasing its business on NASA programs. Currently with the shuttle we do annually about $5 million a year. We have proposals out right now on the CEV, that exceed that by 50 times and so there's a great opportunity for us to see a great deal of increase in revenues commencing particularly on the NASA part in 2006.

On industry consolidation during the quarter Boeing and Pratt & Whitney, our UTC, announced that Pratt & Whitney Propulsion was acquiring Boeing's Rockadyne [ph] unit. If this acquisition goes through it will result in the liquid propulsion part of our marketplace being consolidated basically to two players, the Pratt & Whitney Rockadyne business and Aerojet. We think that bodes well for Aerojet again because the Government will force market share to the smaller player, which will be Aerojet, and it should help us going forward to achieve greater market share in liquid propulsion.

In terms of defense transformation that's primarily affecting us in the tactical missile business. We continue to experience strong demand for existing missile programs, Patriot, TOW, Stinger, are examples. We continue to receive funding in additional areas and one of the interesting things we're seeing right now is an increase in sales to foreign governments including recent sales of TOW and Stinger to Egypt and so we continue to see strong demand there. We continue to see strong support from the government to quickly develop the next generation of tactical missiles and we're also seeing for the first time in years proposals from the government for us to work on strategic missiles which has been an area which has been dominated by Aliantech [ph] so we think we're seeing again the positive impact of industry consolidation.

On the satellite market the last call I told you we had received 11 orders for satellites this year and we've done 4 satellite deliveries in '04. We are currently working on several other proposals to deliver additional satellites so we're continuing to see the move towards more both military and commercial satellites and it's a trend that we thing is going to continue. When we talked about Aerojet I think that the challenge for Aerojet in 2005 is going to be to staff up and to find enough qualified people to continue to deliver the engineering product that our customers seem to be demanding in greater quantity. When you go to development programs your limitation is really human resources because you're going to be charging on a cost plus basis their time to provide engineering services to these government entities. I think what we told you last time is we expected Aerojet to see 5 to 7% revenue growth in 2005. It is clear to us that it is likely to be higher than that in 2005. How much we can't yet tell but I think the potential to achieve greater than that is fairly high and I would expect that we will do that.

In terms of the real estate I cannot stress too strongly how important it is to think of this as a long-term business and as a business that moves at glacial speed but it is continuing to move. We are restoring our land, which has been left as very unattractive due to the prior industrial uses of gold mining, strip gold mining and the rocket testing operations that we had here. This is a slow and very methodical process. Our global settlement agreement with the US Government enables us to reclaim this land and return it to its highest invest use as long as we own the land and as long as Aerojet continues to serve its Government market.

I'll give you a short progress report. It's short because a quarter is not a very long period of time in terms of the time line for real estate projects. We still expect to see the city of Rancho Cordova issue its environmental impact review on the Rio Del Oro project which is a 2,700 acre mixed use project this year, which will begin the comment period and we expect entitlement to occur in 2006. We continue to expect the County of Sacramento to begin its environmental impact review for Glenborough [ph] and Easton Place developments by the summer which means that we have approximately a year before that environmental impact review statement will be released and we would start public hearings on that.

Westborough [ph] is also on schedule with land planning and preliminary engineering work occurring at this time. We are preparing a submission this year for a subdivision application in the County of Sacramento. This application seeks permission for a 55-acre office park in a joint venture with a local real estate business office developer. We expect approval for this application sometime in 2005 and this application does not require an environmental review. As and in all cases we continue to talk to potential development partners for our projects and again we are experiencing even a greater increase in interest over the developments that we are doing. So real estate while it's going at a slow speed compared to what we're able to report on Aerojet, it is continuing at the pace that we expected and we don't see anything right now which would prevent us from meeting the time lines that we've laid out in the past for entitlement of this property. We continue to see a strong marketplace here in Sacramento, particularly for residential, and it may be that the commercial market is starting to pickup a little also.

In wrapping up before we open it up for questions, 2005 we believe we're on the right track and we're seeing all the right trends. In fact, as I said for Aerojet, we're seeing a faster improvement for increase in revenues than we anticipated. We remain focused on building shareholder value through improvements in the operations, increase in market share, and obviously entitlement and development of the property and with that I would open it up for any questions that you might have.

[Operator Instructions] Joe Nadol at JP Morgan.

Thanks, good morning, just a couple of questions. First of all Yasmin on cash flow, you gave a lot of information and thanks for that, just wanted to circle back on it. I guess in total we're looking at about 100 million of negative free cash flow this year, just taking the 70 and change and adding 20 to 35 for the rest of the year. I thought I heard you say that Aerojet would be cash flow neutral. I guess I was trying to reconcile those.

Yes, we do hope Aerojet's going to be cash flow neutral towards the end of the year and looking at cash flow otherwise we've got cash expenses driven by interest expense, you've got legacy retiree medical costs going on. You've got some investments being made in the Fine Chemicals business and capital expenditures. We've got our corporate expenses to cover and we are currently incurring some expenses associated with the real estate as well as we move toward entitlement of these projects and currently included in those numbers are no transactions projected for the real estate.

Right, so Aerojet will be cash flow neutral for the entire year or for the rest of the year? Because you use--

The entire year.

The entire year. Okay, okay. I guess secondly, Terry, on the environmental impact review on Rio Del Oro, I thought the last call we were kind of looking for that relatively soon, over the next several weeks or months. Is that still the case or is there a delay?

It's still the case, Joe. What we expect to see out soon is what's called the Draft Environmental Impact Review and the draft will simply go to probably ourselves and the city and once that's out we have the opportunity to look at and make a few comments and then it goes to the public, so we expect to see it out to the public sometime within-- before summer is-- or summertime. We don't control 100 percent of the timing. It is done by consultants from the city, but it's coming this year.

Okay, fair enough. Third, on the corporate costs, Yasmin there's been some seasonality to them in the past, sort of heavier weighted in the back end. Do you think the 5 million is a run rate or do you think we'll see those build a little bit as the year goes on?

I think that's a run rate, Joe, and we're obviously making our best efforts to make that as a run rate. Will there be some seasonality between the quarters? Possibly, you know in one quarter could you see it as 6 verses 4 or something like that, that will occur, but I think that's our run rate.

Okay, so it seems to be a little bit ahead of plan. Okay, and then finally I noted that the GenCorp pension fund sold I think 2 million shares towards the end of last year. That news just kind of came out or just kind of showed up. Any sense as to-- is there something mechanical going on there?

Here's what that is. That includes shares that are held by the 401K, so individual employees can make those decisions, so I think some individuals, probably retirees, have made decisions to move their 401K out of GenCorp stock. We obviously think it's wrong, I would like more.

Right, so there's nothing going on there where there's active management?

No, it's not an act of management. It's individual decisions. It's not really so much the pension fund as it is the 401K.

Okay, understood. Thank you.

Mike Barone at Akila [ph] Capital.

I had a couple quick questions. One, could you talk a little bit about the Atlas V project, and if I understand correctly that may be restructured this year? And also I'd like to know kind of the time remaining and how many more units have to be delivered on that?

Ok, the Atlas V program was obviously bid a number of years ago. I think it was bid in '98. At the time everybody thought that it was bid in a way that it was bid like a commercial contract. It's the only government contract like that that we've ever bid in this way, which required all of us to put in development costs. It didn't work out because communication satellite market disappeared and you didn't get the kind of volumes that the Government and everybody else anticipated. The Government has realized that they have a problem. The problem is all of their suppliers have large investments, which they haven't been able to recoup into the program so the Government has said they will restructure the contracts. What's currently going on now is they're in discussions with the two primes. For Delta 4 it's Boeing. For Atlas V it is Lockheed Martin. They will negotiate with them first. We have been asked from our prime, which is Lockheed. We're actually on both programs but it's much bigger on Atlas V. From Lockheed we've been asked for information and we are told that within the next month or so we will receive a proposal from them on restructuring the contracts. We're not yet sure exactly how the Government wants to restructure them. There's been rumor mill stuff that the government's talking about doing sustaining contracts, which are kind of like what they have on the shuttle, which basically means that the government will pay for fixed costs and each time you have a launch you bid out the variable costs and the Government awards launches based on variable costs. What's unclear and will remain unclear probably until October, which is the government's fiscal year end, is exactly what it will mean for us on our sunk costs. What it should mean going forward is the program will be profitable because the customers-- or the Government is going to make sure the program is profitable.

We currently because of the uncertainty aren't booking any profit on the Atlas V solid rocket boosters that we're delivering. In terms of the number we originally signed a contract, I believe for 44 firm and 52 option deliveries. Obviously when you start one of these programs you're going to deliver everything that you build and this program if it's anything like the other programs will go years. The Titan program that we're on went 50 years. I don't know whether Atlas V will go 50 years, but it will go a long time. In terms of deliveries I think prior to this year we've delivered in total 5 motors this year. We're going to deliver 12 to 13 and that number will continue to be fairly robust going forward based upon the launch manifest that we can see. The one thing that we can tell you is the restructuring will make this a better program for us in terms of financial results. What we can't tell you is what exactly will that mean yet because we don't know. Does that answer your question?

Yes it does. Thank you for the information. I had another question as well. What happened to the 178 million of restricted cash?

That was used to pay down senior debt. We paid down senior debt of 141 million when we redid our Frederick [ph] facility and we also used 53 million of it to call back the 9.5% of the high yield debt.

Okay, and do you still intend to use proceeds from the chemical sales? You said that they'd be used for de-levering and I believe in cash cushion or liquidity. Do you have any targeted break out of proceeds? How much would be used to de-lever and how much would be used to keep as cash? If I recall correctly it would be about 100 million in proceeds, you're guessing?

Depending on exactly what the proceeds are, our intention is still to use the proceeds to de-lever and to add additional cash and liquidity to the balance sheet.

We don't have a breakout yet.

Okay, no break down, but do you anticipate using the majority for de-levering?

Well, we're always you know-- obviously what we can pay down and our goal is to keep an unused revolver so we're limited as to how much we can easily pay down.

Okay and could you just comment on the net shares settlement with the converts? Are you guys going to start accounting? How are you looking at those at this time?

I think we're still in a locked position and we're still evaluating the net shares settlement and whether we would make any changes to the existing converts.

Okay great. Thank you very much for answering my questions.

David Lorver [ph] with Private Capital.

Good morning, revenue growth for the Aerojet business is seeking to exceed the 5 to 7% projections. Would we also expect that the cash flow neutral guidance could also be exceeded?

I don't think we'll know till year-end, David. We've got so many proposals out there. We're going to have to wait and see which ones we win and schedule how that impacts us. Like I said we've got a-- it's a lot of potential business out there and it question of how much are we going to get.

Okay, the billed and accounts receivable in the quarter, could you go through that a little bit?

That's again, David, driven by the fact that we've got some timing stuff associated between '04 and '05 is the billed of $15 million and that's really a timing issue.

Okay and then largely the inventory billed and the current inventory that you have is Atlas V, is that correct?

Exactly.

Okay and that program seems to be going quite well if we're still expecting 12 to 13 and maybe exceeding that?

Yes, it's going well compared to how it's gone in the past years, yes, David.

Great, thank you.

Thank you and there are no further questions at this time. Please continue.

There are no further questions. I want to thank all of you for being on the call. We will talk to you again in the next quarter and we continue to look for good things, so thank you all and good day.

Thank you. Ladies and gentlemen, a replay of today's conference will be available from today March 31st, 2005 beginning at 11:30 PM Pacific Standard Time through April 14th, 2005, ending at midnight Pacific Standard Time. To access the replay please dial toll free 800-475-6701 or internationally 320-365-3844 and enter the access code 776300. Ladies and gentlemen, that concludes today's conference. Thank you for your participation and for using AT&T Executive Teleconference, you may now disconnect.