Aerojet Rocketdyne Holdings Inc (AJRD) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the GenCorp first-quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be provided at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded.

Introducing your host, Ms. Linda Cutler -- ma'am, you may begin.

Good morning, everyone, and welcome to GenCorp's first-quarter 2006 conference call. Before we start, I'd like to remind you 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 first-quarter 2006 earnings 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.

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

Thank you, Linda, and good morning to everyone. During the last month and a half, we have had the opportunity to meet personally with most of our large investors. The conversations have been extensive and rewarding in the sense that we have a keen understanding of the concerns you have for our Company going forward.

Let me say a few words about our Board composition before I speak to the efforts of the first quarter. We welcome our new Board members, Robert Woods, Todd Snyder and David Lorber, and we welcome their input as we continue to pursue our successful strategy to grow our Aerojet defense business while we complete our important but long-term efforts to unlock the value of our substantial real estate assets.

Together, your existing and new Board members will work to further defined and refine good corporate governance and effective solutions to our unique business challenges. In fact, our commitment to end our poison pill or our controversial shareholders' rights provision was made public before the election of the new Board members. Together, we will remain a strong and independent Board, communicating openly and constructively about GenCorp's strategy, the business issues we face and the most effective path to our goals.

Now let's turn to a review of the first quarter. Sales were strong in the first quarter, although volume declined about 8% in the quarter from a year ago on an absolute basis. As you may recall, we told you prior to the beginning of the year that we were initially starting with about 70 million less in revenue due to a reduction in the Titan program and a reduction in Atlas V revenues.

Our goal this year is to get close to 600 million in revenues. But again, we are starting from an initial point in time where we have to make up 11 to 12% of the revenues in order to replace Titan and Atlas V.

We're not seeing anything that would give us a great deal of concern about lower revenues in the first quarter. We expect to see stronger quarters going forward. But you will notice that our margin was low in the first quarter and it was driven by the mix of business in that quarter.

The good news is Aerojet continues to win new contracts, which should help us offset the revenue losses from Titan and Atlas V. New contracts are coming from recent NASA exploration initiatives, as well as military and civil programs. I will review them in a few moments. But important for you to keep in mind is that propulsion is critical to both NASA and DoD objectives across the board.

Let me also take a moment to comment on one of the discoveries we made as we met extensively with investors over the last few weeks. Not all of our investors fully understand the importance of the connection between our Aerojet business and the funding needs of our real estate business.

Integration between our two core business is critical to our strategic success. The new business we develop at Aerojet is not just the foundation of growth for Aerojet, it is also the basis for funding for the environmental remediation that makes our real estate plans both realistic and, obviously, quite lucrative to the future of the Company.

We are today a simpler corporation with lower costs to run our businesses, and most importantly, very focused goals. Before I discuss the quarter further, and the status of our real estate effort, I want to turn the call over to our CFO, Yasmin Seyal, for her comments on the financial numbers this quarter.

Thank you, Terry, and good morning to everybody. Today, the Company reported a first-quarter loss of 16 million or $0.29 per share, compared to a loss of 31.4 million or $0.58 per share in the first quarter of 2005.

The Company reported a first-quarter loss from continuing operations of 14.4 million or $0.26 per share, compared to a loss of 30 million or $0.55 per share in the first quarter of 2005. The 2005 loss included a pretax charge of 18 million associated with the Company's recapitalization transactions that we initiated late in 2004 and completed early in 2005.

To note, both periods do include retirement benefit plan expense, which is mostly non-cash. The 2006 amount is 11 million compared to 12 million for Q1 of 2005. I would like to comment a little on our continuing operations in more detail.

First-quarter sales were 129 million in 2005, compared to 140 million in 2005 sic, with the decrease occurring at Aerojet. Aerojet sales were 127 million in the first quarter of 2005, compared to 138 million in 2005, with this decrease primarily being because of the Titan contract.

We commented in our year-end call that because of the final Titan IV launch in November 2005 and completion of our related support activities on this contract, together with reduced deliveries under the restructured Atlas V contract, 2006 year-over-year sales would be unfavorably impacted by approximately 70 million.

The good news on this side is that as we continue to experience growth across the board in our other product areas and we have seen a growth in the backlog in the first quarter, we now believe that much of this revenue impact or this revenue shortfall should be offset by the end of 2006 if these trends continue.

Aerojet's segment performance for the quarter, excluding retirement benefit plan expense, was 8.2 million or 6.4% on total sales, compared to 10.2 million or 7.3% on total sales in first quarter of 2005, a decline. The decline is primarily driven by the Titan program, which as I just discussed was a mature fixed-price program that generated fairly high margins.

We expect the margin percentage decrease that we saw in the first quarter to rebound over the course of the year to a level more in line with the mix of our programs that are weighted towards R&D contracts compared to heavier production contracts.

Turning to real estate, first-quarter 2006 performance in our real estate segment was comparable to 2005, with around 2 million in revenue and 1 million in segment performance in each quarter, really reflecting our ongoing leasing activities and no other real estate transactions.

Corporate and other expenses were 5.5 million in the first quarter of 2006, compared to 4.1 million in 2005, with the increase being driven by expenses related to the unusual circumstances surrounding the election of the Board of Directors this year.

Interest expense declined to 6.3 million in the first quarter of 2006 from 7.1 million in 2005, reflecting lower average debt levels and interest rates and also, really, the recapitalization efforts that were completed in the first quarter of 2005.

Next I'd like to turn my comments to debt and cash flow. Our net debt position, total debt less cash, as of the end of February 2006 was 393 million, compared to 352 million at the end of the last fiscal year, representing a cash usage of $541 million in the quarter.

The 41 million is broken down essentially into two components -- 34 million being driven by continuing operations and 7 million being driven by discontinued operations. Let me talk first to the continuing operations and cover broadly what the various categories were.

We used about $3 million for capital expenditures, primarily in Aerojet. 9 million was used for cash interest payments. We used about 5 million for legacy retiree medical and non-aerospace and defense environmental matters. The balance of the 17 million was used in operations that reflect primarily a working capital investment to support Aerojet's business growth. You can see a growth in inventory there. And also, it reflects repayment of cash advances that we have collected in prior years, which we have discuss previously, that we are now having to pay back, and just to a certain extent, the timing of Aerojet's working capital needs in terms of payables and receivables. In addition, we used cash for corporate expenses.

The cash of 7 million used in discontinued operations reflects payments of liability that we had accrued as of November 30 in connection with the AFC transaction, including some transaction costs, which we had talked about previously and said we expected to pay some -- a fair amount out of 10 to $14 million in total in 2006. The balance will be paid over the second and third quarters.

I would like to comment, make one comment with regard to cash flow for the second quarter, too, is an unusual event. We expect to pay about 13 million. In fact, we have already paid $13 million to the DoD. And that is in connection with the refund of franchise taxes that we received many years ago. And that cash outflow did happen in March. And you will see that reflected in the second-quarter numbers. And as you may recall, we did record a favorable income impact in our 2005 results because of this settlement and this cash outflow.

I would like to next comment briefly on our LC requirement and as a result of these financial obligations that we were required to post or will be required to post in the second quarter, which we do discuss in the release this morning.

Aerojet, under various state laws, is required to demonstrate that it has the financial ability to remediate environmental conditions in the event of the closure of certain facilities, such as hazardous waste treatment facilities, certain landfills or radioactive decommissioning. Now, Aerojet is required to do this on an annual basis and can do so either through various financial assurances or the posting of security.

We found that the various state agencies are becoming more and more stringent in this area and their requirements are becoming fairly onerous. This year, we were required to actually post letters of credit to satisfy these obligations. Now, these requirements and these costs are part of doing business with the government. They are part of an aerospace and defense cost, and if and when incurred, would be recoverable under our government contract.

On a go-forward basis, we are looking at the possibility of increasing our letter of credit facility such that we would be able to keep our revolver on an undrawn basis and not need to use our revolver to actually satisfy these letters of credit facilities. But we will comment more on that at the second-quarter call.

As of the end of February, we had cash balances of 50 million on an undrawn revolver of 80 million. And we have more than adequate liquidity to go forward to continue with our strategic plan of getting the real estate entitled and strengthening Aerojet on a go-forward basis.

At this point, I'd like to make a comment from the Company's perspective on our views on issuing guidance as we go forward. We certainly today commented on our call with regard to sales for 2006 versus the 2005 and brought to your attention the major significant items and we've commented on some of the significant cash flow items.

Other than those comments and further detail that we will provide in our quarterly releases and filings, on a go-forward basis, we will not be providing more detailed guidance. We have looked at practices across the public company universe lately and assessed them, and find that although specifics do vary from company to company, more restrained guidance and less quarterly guidance seems to be becoming a trend.

With that, I'd like to turn the call back over to Terry. Thank you.

Thank you, Yasmin. Let's take a look at what we see in the quarter and what clues it gives us to the future of the Company. As you can see, our backlog is growing. It has grown from 696 million to 742 million. That's about a 6.5% increase.

Where we are seeing that growth is across all of Aerojet's areas. But it is interesting -- one of the areas is something that we don't mention that often, which is strategic missiles. Our competitor in that area of the marketplace is Alliant Techsystems, who have a vast majority of that business.

In the last three months, we have been awarded three contracts on the new strategic ICBM development, the last one being a propulsion application program for about $11 million. This we believe is a direct result of, one, the consolidation of the propulsion industry, and two, the technology that Aerojet possesses, which it is using to its advantage in this area.

Secondly, in tactical missiles, we continue to see strong demand and strong funding from our customers. We recently received an award on NLOS non-line of sight program. The award should ultimately total about $25 million. We did a THAAD fire test in the quarter that was successful. And we also received additional contracts on standard missiles and HyFly. And so that is an area that continues to look good for us.

Finally, the other area that is looking good for us is in-space propulsion. We were the major propulsion supplier on the Mars reconnaissance orbital mission, which is now orbiting Mars. We also, in March 20, sent in our proposal for Phase II of the crew exploration vehicle in the NASA program that will replace the shuttle. There are two teams bidding on that, a Lockheed team and a Northrop Grumman/Boeing team. We are on both teams and we're looking forward to the award of that contract to one of our two primes sometime late summer, early fall.

So on the Aerojet side, we continue to see opportunity, and despite the first quarter, we think it has a bright future. And we have a belief that it will come close to 600 million in revenue this year or will come close to making up most of the shortfall caused by the Titan/Atlas reduction of revenues.

In real estate, we think we are on track to get to entitlement. We obviously have three or four projects currently in play in various states of entitlement. We obviously do not control every facet of entitlement. We are dealing with local government. We are dealing with two federal agencies, the Corps of Engineers and the Department of Interior. We do have a lot of land under the entitlement process currently. It is approximately 10 square miles,, which is about half of the property here in Sacramento.

Rio Del Oro, which is the property that we had hoped we would have an environmental impact review statement out for public comment late this year, right now it looks like we won't see that out until June or July of '06. And we probably, then, won't see entitlement until mid-2007. That is a result of the Corps of Engineers' comments and the Department of Interior negotiations on endangered species and a requirement of Section [610] of a water letter saying that we have a permanent source of water for the development. We are still waiting on that from the county.

We do not believe that we see major delays in that program or our other two programs. As you recall, the other two is Westborough, which is roughly about a 1700 acre project, which we expect entitlement in 2008, and Glenborough, which is another 1450 acres, which the entitlement authority is the County of Sacramento. There we're expecting to receive entitlement during the latter half of 2007.

More importantly, we get asked a lot about the softening real estate markets, and all of us have read about the real estate bubble. We think that we have several advantages, being located here in Sacramento.

One, all of the studies that we can see forecast a housing shortage in Sacramento over the next 20 years. Current estimates are that there is a need for a 20% increase in new home starts in this market over the next 10 years. We don't see anything that is changing that.

We continue to have, we believe, the best location in the Sacramento market. We are an infill site. Infrastructure exists around us. Residents exist around us. And it is a very large advantage when you talk about infrastructure costs and you talk about avoiding urban sprawl, which has been very high on the list of public importance here in California.

About four years ago, we started our real estate program. We started it with the release from the Superfund site of 2600 acres. In that four years, we've come to the point where we are within 12 to 15 months of getting entitlement and being able to really start seeing the value of our property.

That is a lot of progress in a very short period of time, and we are going to continue to relentlessly push for additional progress on our real estate front. In light of where the Company is this quarter, I look forward to reporting you on the next quarter's progress, and I would be pleased to open the call now up for any questions.

(OPERATOR INSTRUCTIONS). David Thurber, TKI Capital.

My question is regarding your cash flow for the quarter and for the rest of the year. I am a little concerned about your liquidity situation and what plans you have to address that over the next year. I mean, $40 million is an awful lot to see this quarter. Is that a rate we can expect to see over the next year? Could you just comment on that? That would be great. Thanks.

I can comments on that. I think in terms of our cash flow, most of the cash outflow was in the first quarter. So we're not going to do 40 million a year or 40 million a quarter in terms of cash outflow. We think that we have adequate liquidity, given everything we can see, and in fact believe that cash flows will improve in 2007 and 2008. And we have been pretty much consistent with that.

Joe Nadol, JPMorgan.

A couple of questions. I guess the first one is with regard to the new Board, Terry, I am wondering if it's met yet, and if not, what the first scheduled meeting is?

The first scheduled meeting for the new Board will be in May.

Secondly, just digging into the Aerojet margins a little bit, how many Atlas motors were delivered in Q1?

Joe, at this point, we are -- for the full year, we are looking at delivering six motors, and in the first quarter, we actually delivered two.

Okay, so if I do back of the envelope on that, if that was our assumption, we get to a margin of a little over 7%, ex the Atlas business and of course the retirement expense. Is that consistent with where you are?

Yes.

And so the mix in Q1, it's fair to say the mix gets better throughout the year, but you're really not talking about Atlas. You're talking about all the other stuff gets a little bit better as we progress through the year?

Exactly.

And one more question on that. Were last year's numbers restated? Because I had 13 million of EBIT pre-retirement and it looks like here you're saying last year was 10 million.

Yes. And that was -- we restated them in the first -- when we filed the 10-K, we showed the reported numbers and the new numbers.

I will have to take another look at that, I guess. On the real estate, is it fair to say that your discussions with regard to Rio Del Oro, and not with the entitlement authorities and the local authorities and all that, but rather with regard to any kind of deal you might cut, have been -- that there's a little bit less urgency to them because we are six months later than we thought we were going to be, or are those still progressing?

No, they are still progressing. Everything that we are seeing suggests there is interest in doing a transaction. It will be relatively complex because it is a transaction that we would enter and it ultimately would be a partnership or a joint venture. And so it's going to take some time to do it. But the timing on the receiving entitlement aren't affecting the timing on that transaction right now.

Okay. Can you give any indication as to how far along you are? Or is it still something that is going to be several quarters off, in your expectations?

We have basically been telling people it's probably three to eight months away.

Troy Hottenstein, Redcliff.

You mentioned in the earlier part of the call that you, for the environmental reasons, you could not separate the real estate from some of the other businesses. Is there any reason why you could not separate some of the land that doesn't have any environmental problems from the rest of the Company if you wanted to?

The only issue would be -- there's two issues. One issue is the land, even some of it which we are in the process of entitling, has little surface areas that, yes, need to be cleaned up. And so it is hard to get a parcel of much size, anyhow, of any scale that you could separate out without some environmental remediation necessary.

Obviously, the second thing is, and what we're finding is, the more land that we can control into a parcel, the more you can optimize its value, given that people are looking for inventory in terms of lots in our area. And so it just doesn't seem to make a whole lot of sense that you can do much right now. It becomes a lot easier after you get entitlement.

(OPERATOR INSTRUCTIONS). Tim Hasara, Kennedy Capital.

In your opening comments, you made a comment that you have lower costs to run your business. And we continue to see large losses and large cash flow negative. How are you measuring that so I can sort of measure that in the future?

We look at what we can control. Obviously, one of the things that we try to control is our corporate costs. Corporate costs are down, not particularly this quarter, but they are down. And we continue to try to push them down.

We have less and less legacy costs. We have been spending a whole lot of money on litigation defense. Obviously, if you look at the K, one of my shareholders told me five years ago we had 22 pages of legal disclosure. This year, I think we had three. What has gone away is a lot of the expense that we had. In some cases, it was expense from old General Tire costs, legacied from litigation. In some cases, it is expense from Aerojet litigation.

All those have gone away. In fact, last year I think we have gotten basically dismissed in total two large losses which initially both had somewhere in the neighborhood of 1700 plaintiffs. And so we have been working on what I would call the legacy liability costs, and they have come down quite dramatically. They don't all flow through the P&L. Some were reserved for, some aren't. But that has been the major thrust -- that and improving the operations of Aerojet.

And just as I see, on the surface you're talking about improving operations -- still, the reported numbers are, frankly, abysmal. You continue to lose a lot of money on Aerojet. And it is just hard for me to see how the costs are lower and --

Well, you've got to remember that 11 million of that was non-cash and pension. And so pension, there's nothing you, I or anyone can do. That is the way the accounting is required to be done is non-cash. Is Aerojet making money? Yes. Can they make more? Yes. But it is going to depend on their contract mix more than anything else. They have tripled their revenues in the last three years. And they are at a point where they are going to be the cash provider for this Company.

I'm sorry, you said tripled revenues over the last three years?

Last four.

Last four, but that was from acquisitions. Internal --

No, a third of it was -- 200 was from acquisitions. 200 million was from internal growth.

(OPERATOR INSTRUCTIONS). At this time, we show no further questions. Thank you. I will turn the conference back to our speakers.

All right. Thank you all for joining us. We will look forward to talking to you at the end of Q2. Thank you and good day.

Ladies and gentlemen, this conference will be available for replay after 12:30 PM Eastern Time today through April 26, 2006, at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 825669. International participants, please dial 320-365-3844. (OPERATOR INSTRUCTIONS).

That does conclude our conference call for today. Thank you for participating and for using AT&T Executive Teleconference. You may now disconnect.