Aerojet Rocketdyne Holdings Inc (AJRD) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the GenCorp second-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 given at that time. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded. I would now like to turn the conference over to Joanne Keeter. Please go ahead.

Thank you, operator. Good morning everyone and welcome to GenCorp second-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 the second-quarter 2006 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.

Now I would like to turn the call over to Terry Hall.

Thank you, Joan, and good morning everyone. I'm going to make a few comments and then turn it over to Yasmin Seyal, our CFO, to talk about the quarter and then I will come back and give you a little more color on the operations and what occurred during the quarter and what we expect to see for the remainder of the year.

For this quarter I think the important things are we are seeing Aerojet continue to grow its revenues and improve its margins. It is after a weak first quarter, Aerojet is back on track and right now what we're seeing in Aerojet is a strong demand for its products from its customers. And we expect that to continue.

On real estate, again, it's a lot like watching a glacier move. But we are making progress. We will talk about that progress and we expect to hit our 2007 entitlement schedule that we talked about in the past. And we continue to push forward on negotiations of a transaction to have a partner on our Rio Del Oro project.

Now I will talk a little more in detail later about the operations, about our legacy liabilities and about real estate. But right now I'm going to turn it over to Yasmin Seyal and let her go through our financial performance for the quarter.

Thank you, Terry, and good morning to everyone. Today the Company reported a second-quarter loss of $7.3 million or $0.13 per share compared to net income of $5 million or $0.09 per share for the second quarter of 2005. We reported a second-quarter loss from continuing operations of $10.4 million or $0.19 per share compared to a net income of $3.5 million or $0.06 per share for the second quarter of 2005.

The 2006 loss does include an $8.5 million unusual charge for the recent $25 million settlement of the toxic tort claims that we had issued or released a few weeks ago. The charge represents the portion of the settlement that will not be recovered under Aerojet's contract. Just to remind you we did take a similar unusual charge in the second quarter of 2005 for $2 million when we settled the Southern California toxic tort cases. These settlements do put the toxic tort cases behind us at this point in time.

The second-quarter 2006 loss includes an income tax benefit of $4 million for the ten-year carryback of net operating losses whereas the 2005 net income included an income tax benefit of $12.9 million for the same reasons. Both periods as you know do include retirement benefit plan expense which is mostly non-cash. The 2006 amount is $11 million compared to $12 million for 2005. As I've noted this before, most of this expense relates to deferred recognition of the underperformance of the pension plan assets in prior years and past decreases of the discount rate used to determine benefit obligations due to lower market interest rates.

Now as we watch the rising interest rates, we expect the discount rate used to determine benefit obligations to increase which could result in future decreases in future expenses. We are in the process of assessing what this may be. Our measurement date is August 31 of 2006 and we will shed more light on this in our third-quarter call when we report third-quarter earnings. Our major pension plans have been and do remain in an overfunded position.

Looking at our continuing operations in a little more detail, second-quarter sales were $167 million for 2006 up 15% compared to $145 million for 2005. Aerojet sales were $166 million in the second quarter of 2006 compared to $143 billion and 2005 with the increase being delivered -- being driven by higher sales under the Atlas program and offset somewhat by the Titan and Standard Missile programs but we do see increases in other programs as well.

Aerojet sales through the first half of the year were $293 million compared to $282 million in 2005, up 4%. Aerojet's segment performance for the quarter excluding retirement benefit plan expense and unusual items, was $16.8 million or 10.1% on total sales compared to $14.8 million or 10.3% on total sales for the second quarter of 2005. The comparable returns to the first half of the year were 8.5% in 2006 compared to 8.9% in 2005.

Looking at real estate, second-quarter 2006 performance was comparable to 2005 with approximately $2 million in revenues and $1 million in segment performance in each quarter. These numbers reflect our normal ongoing leasing activities and do not include any real estate transactions.

Corporate and other expenses were $6.3 million in the second quarter compared to 2005 number of $5.2 million and that increase is driven by the expenses associated with the Company's election of the director earlier this year. Interest expense was up to $6.4 million from $5.8 million in 2005. You'll note that we do have a gain in discontinued operations being reported in the second quarter and that is primarily the result of the final settlement of the purchase price adjustment associated with the GDX business that we sold in 2004.

My comments next are on debt and cash flow. Our debt position which is total debt less cash as of May 31, 2006 was $404 million compared to $393 million as of February of 2006 representing a net cash usage of $11 million for the quarter. And as I've noted in the last quarter's call we were going to pay out $13 million for the final settlement of amount due to the government customer for their share of tax refunds we received back in 2001. We did pay that amount in March and that really represents the cash usage that occurred in the quarter. So if you set that issue aside, the Company generated $2 million of cash flow during the quarter.

With the tax refund settlement behind us, the restructuring of the Atlas contract in 2005, these are major steps in positioning Aerojet now as we go forward as a generator of cash flow. And we should see this occurring as we go forward.

Talking a little bit about the senior credit facility, as you are aware we did complete the amendment of that in the last few days. The amendment provides for an increase in the letter of credit facility from approximately $44 million to $80 million, and an increased term loan from $54 million to approximately $74 million. The increased LC facility will be used to provide LCs for environmental obligations, which we talked about in the last quarter's call too, and the increased term loan is used to cash collateralize the 5 3/4 notes that are due in April 2007.

As of May 2006, we had cash balances of $39 million on hand and once the existing LCs of $26 million are moved to the new LC facility, we will have an undrawn revolver of $80 million available to us as we go forward.

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

Thank you, Yasmin. Now I'm going to talk about the three different areas that we manage. First let's talk about legacy liabilities. During the quarter as Yasmin said, we settled our last 10 toxic tort claims on environmental issues relating to Aerojet. These were claims that exist or took place in the 1950s, 1960s, 1970s and 1980s. We settled the final claims originally five years ago; we had 1670 claims. They are all gone away and it is a big reduction in unknown liabilities for this Company. We currently do not have any other toxic claims pending and don't see any reason why we should receive any such claims.

In terms of Aerojet, let's talk about the Aerojet business. When we started the year we told you that because of the reduction in Titan and the reduction in Atlas V revenues, we had to make up $70 million of revenue in order to get back to the level of revenues that we had in 2005. It now looks like we are very close to being able to do that and we are forecasting something slightly higher than the $600 million in revenues that we gave you before. Again we are seeing strong demand across the board for Aerojet's products and we continue to see support from Congress and from our customers on most of our programs.

In terms of what we are looking forward to in Aerojet and the things that you should be watching for, obviously the NASA opportunity, as we call it, which is really for us the true exploration vehicle which is the replacement for the shuttle is the big contract opportunity. What NASA has told us is that they will award a contract to one of two prime teams this fall either August or September if they are again on schedule. One team is the Northrop Grumman team, the other team is the Lockheed Martin team. We are teammate on both of those primes and it looks like we will get a substantial portion of the program whether Lockheed wins or whether the Northrop Boeing team wins. Again that is something that should be a program that will exist for 20 or 30 years just as the shuttle has done.

During the quarter also we had a successful Atlas V launch with a single motor launch configuration. Atlas V no longer is the problem child of Aerojet given the restructuring of the contract that we did. And we are pushing Aerojet to try to make that program actually cash positive as opposed to cash neutral.

During the quarter Aerojet received another award that we were awarded the safety improvement award for the greatest reduction in injuries and illness for the Airspace Industry Associated Worker Safety Program. Earlier this year, Aerojet received also the Boeing Supplier of the Year Award. So we are seeing good operational performance and excellence at the Aerojet business.

Let's turn to real estate. Real estate obviously we've been focused on getting entitlement. The initial program or project that we are leading the schedule on entitlement is the Rio Del Oro project in the city of Rancho Cordova. In our last call I told you that we didn't expect to see the EIR out for a public comment until June or July. It's not out. What we are told by the city of Rancho Cordova is that they are waiting on a response from the Corps of Engineers on the wetlands issues and expect that response to be to the city in August. So assuming the Corps. meets the city's schedule, now we expect to see the EIR out for public comment sometime in August. What we've told people consistently is we expect it to take nine to twelve months from the time that it comes up for comment to the time that you get -- that we get approval from the City of Rancho Cordova. And so that is now our time frame. And it really is in the control of the city and the core at this time.

Also, this week the City of Rancho Cordova approved their general plan which is part of the process. We have been working with the city to make sure that our EIR on Rio Del Oro complies with the general plan that they were in the process of approving and have now approved, so it is another milestone in getting to the entitlement.

On our two other major projects, the 1400-acre Glenborough project is being processed through the County of Sacramento and we haven't seen any substantial delays and so we still expect entitlement in 2007. The 1700-acre Westborough project is still being processed through the City of Rancho Cordova and we expect entitlement in 2008.

Let's talk a little about what we are seeing on market conditions in Sacramento for residential housing. The market is down, basically the forecast for the market this year is between 30% reduction in building permits for single-family homes to 40% reduction for single-family homes from outside forecasters that we look at. In 2005, to give you an example, there were approximately 18,500 single-family permits and the forecast that we are seeing are between roughly 11,000 permits and 13,000 permits for this year. We haven't seen anything which would indicate that the forecast, long-term forecast for the markets are changing.

The forecast is still for substantial growth over the next 15-year period for Sacramento. For our particular area the forecasted growth is about 2.7% a year. We are continuing to watch the market. However, taking our Rio Del Oro project by itself, that is a project which we expect product, single-family home sites to come to the market between the years of 2008 and 2015 or 2016. So this is a long-term venture for us and we expect that the market will fluctuate both up and down during that period.

At the same time we've also said that we are in the process of exploring a transaction with a large national homebuilder to partner our joint venture on the Rio Del Oro project. What I can tell you is we are in the midst of doing that. We are at the stage where we really can't give you any comments because we don't want it to affect the negotiations that we are in. However, it is still our objective to joint venture on Rio Del Oro on the residential piece of that property. And we also have some commercial property which is not included -- will not be included in any kind of joint venture.

With that I think I would like to open it up for any questions that you may have for Yasmin or myself.

(OPERATOR INSTRUCTIONS) Joe Nadol with JPMorgan.

Thanks. Good morning. First question just on the entitlement process for Rio Del Oro. It looks like I guess this is a two-month delay in terms of the EIR publication or release relative to where you were before. You had said there's a few months delay out of '06 before this on Rio Del Oro so just trying to triangulate here. We saying 2007 but do we still think this is a first half of the year thing or do we think this is a second half of the year thing?

I think, Joe, what we said last time or what I said is we expected it June or July. This is a one to two month, assuming again the Corps. of Engineers meets the city's timeline saying they will have their comments to them in August. What we've also told people is look, it could be anywhere from nine months to twelve months from the time that you get the public -- it published to when you get final approval. That depends upon the number of public hearings that are necessary to be called. So that gives -- it kind of gives you the timeframe of when it is likely that we would see entitlement on Rio.

Okay. On the JV opportunity. I know you can't say much but could you talk about the environment a little bit? I mean most of the homebuilder stocks in Q2 were down roughly 25%. Your stock was impacted and a couple of other companies that own land were impacted. So clearly the stock market at least is discounting some problems not really as much in '06 but really looking out a couple of years. That said, a lot of homebuilders still are interested in keeping a nice inventory of land available for them. What are you seeing in terms of their appetite?

It depends on the builder; it depends on how much inventory they have in the marketplace. If they have a lot of inventory in the marketplace obviously they are carrying cost that they want to get out of. If they don't have a lot of inventory in the marketplace, it's a marketplace they want to get into. So we are seeing both extremes I might say.

Okay. Just some specifics on Aerojet then. How many deliveries did you make on the Atlas program in the quarter and what is your expectation for the year?

We made one delivery in the first quarter. We expect to make one more -- we made one delivery each, I'm sorry, in the first and the second quarter. We expect two in the third quarter and two in the fourth quarter, so six this year.

Okay. And then on the margins, you know you had a very strong quarter on the top line and that carried through into the EBIT margin exing out the settlement and the retirement expense. Is that sustainable or is that -- is this just kind of a surge because you had some delays in Q1 and you're looking for something more in between Q1 and Q2 in terms of EBIT margin in the rest of the year?

Well, you know we keep telling Aerojet to sustain it. Whether they will be able to or not will depend on the rest of the year. Right now what we think is we're going to see margins similar to what we saw last year.

Okay. And just finally on the cash, you mentioned that Aerojet should now be a cash generator. Can we expect that to -- should we take that to mean that this Company will generate cash, even a small amount in each of the next couple of quarters?

We are certainly striving to that, Joe. That is our goal here as we go forward. Clearly we generated cash in the second quarter setting aside the issue associated with the refund of the taxes. And that is the goal that we are striving hard to and working toward that.

Didn't you get a benefit though in the second quarter from the auto divestiture or is that non-cash?

It is essentially non-cash.

Okay. Okay, thank you.

[Robert Smith] with [Center for Performance Investing].

Good morning. Could you share with us your feeling or finger on the pulse of what has been happening in the corridors of power with the possibility of a North Korea launch and how this might impact the Missile Defense Program?

It has been interesting. That is a good question, Robert. What we saw earlier in the year was Congress and Senators saying that maybe they were going to reduce the budget for Missile Defense. About the time they said that North Korea came out with their Intercontinental Ballistic Missile test or proposed test and suddenly we are hearing the exact opposite from Congress now. Obviously Missile Defense is a big program for us and we are in almost every -- we are in every platform. And so we are watching it carefully.

We can't tell but obviously what we are hearing particularly Senator Warner's comment the other day that it is a threat that we have to be prepared to respond to. Suggests that Missile Defense budget will not be the budget which pays for other things that DOD want to do. So it is good news for us, if you can call anything that's a threat to United States as good news. But from a business sense, it is good news for us.

Thank you.

Eric (indiscernible) with [Hunter].

Good morning. Can you comment on what your cash flow from operations were this quarter?

When you look at cash flow, Eric, we obviously used $11 million of cash flow. And the bulk of that was associated with the settlement -- aside from that we generated cash -- we generated cash flow. So Aerojet generated cash flow which covered the CapEx for Aerojet which covered the cash interest payments, corporate cash expenses and also some of the legacy retiring medical costs.

The 11 million, is that cash flow from operations or total change in cash?

That is the total change in cash.

Okay. What about from operations?

Continuing operations used cash of $7 million and discontinued operations used cash of $4 million. And the discontinued operations cash flow was really paying off some of the obligations associated with the ASP divestiture and we early on in the year, we projected that we would be paying somewhere between 11 to 13 or $14 million in connection with that. The bulk of that went out in Q1 and the remainder went out in Q2.

So compared to last year's second quarter, it looks like you used $64 million during the quarter?

For the full year?

No, no, no during the quarter last year, the comp period?

Yes. And that would probably have a lot associated with fine chemicals happening at that point in time.

Okay, non-current. Okay. And you're CapEx for the quarter?

$3 million.

$3 million. Okay. Do you see that staying at $3 million for the next couple of quarters?

We are certainly trying to hold Aerojet's CapEx. But typically towards the end of the year it can be a little bit higher.

Okay, great. Thank you.

Tim Hasara with Kennedy Capital.

In your press release you mentioned the Sacramento land, the 625 acres that it is this sphere of influence. You really haven't put that in a press release before. I know you had it on your investor presentation. But I wonder if you can give me a little bit more color on what that is going to be designated for and the plan for that?

Here is what it is. We have three entitlement authorities on different parts of our property, the [less] third of our property is the City of Rancho Cordova roughly, the county has the rest of our property and then we have 625 acres which is the northeastern part of our property which is in what is called the Sphere of Influence of Folsom which means basically Folsom some time in the future can annex the property. Folsom, the City of Folsom is just about build out. They want more property. There is about I believe, Tim, about 1800 acres in total that they have to annex at the same time which our 625 is a part of. They want it for residential. So it is really the City of Folsom that is pushing the schedule on our 625 acres. And it for them it would be moving them south, if you know the area, south of Highway 50. Most of Folsom is north of Highway 50. And so they are the ones who are really pushing the development or the entitlement and the annexation of this -- of our 625 acres.

But there is a state agency which controls annexations in the State of California which has basically told the City of Folsom they have to annex I believe it is 1800 acres in total all at the same time. So we have reached agreements with -- and the City of Folsom has been driving to reach agreements with all the owners of that 1800 acres at the same time.

Then at some point will this be a new development for you?

It will be a new development. Again it is out because annexation process in California, like every other development process, are not swift. It is out past 2008. But it's again a sign of the demand and at least the environment for development here in the Sacramento region.

I don't know that area that will. As far as a price per acre or value for that land, is it -- where does it fit in with your other three developments?

It is a good question. And it is not one I can answer specifically. I think what I can tell you is a Folsom address seemed to have a premium on pricing for homes as one of the areas that has a premium. So it may have more value because of the Folsom connection. But what we don't yet know is what would be the fees that Folsom would charge on it because we are a long ways away from being able to tell people what's the cost.

Okay, thank you.

(OPERATOR INSTRUCTIONS) There are no questions. Please continue.

All right. Thank you everyone for dialing in. We will be talking to you about the third quarter in a few months. So good day.

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