Aerojet Rocketdyne Holdings Inc (AJRD) 2006 Q4 法說會逐字稿

Welcome to the GenCorp 2006 fourth-quarter and year-end results conference call. At this time all participant lines are in a listen-only mode. Later there will be an opportunity for your questions with instructions given at that time. And as a reminder, today's conference is being recorded. I'd now like to turn the conference over to Linda Cutler. Please go ahead.

Thank you, Lea, and good morning, everyone, and welcome to GenCorp's fourth-quarter and full-year 2006 conference call. Before we start I'd like to remind you that during this 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 fourth-quarter and full-year 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. So with that I'd like to turn the call over to Terry Hall.

Thank you, Linda, and good morning, everybody. I'm going to start off with a few comments about 2006, then I will turn it over to Yasmin to go through the financial results and then I'll come back and talk a little more about '06 and about what we're seeing looking forward into '07.

2006 was a year of continuing improvement at our Aerojet unit. EBIT margins were up for the year to 9.9%, cash flow is obviously improving. At the beginning of the year we had to immediately make up a loss in revenue of about $65 million from a reduction in the Atlas and Titan program. We did make that up. And obviously we spent a lot of time talking this year to you about -- we've had a very strong year in terms of bid and proposals.

We won the propulsion system on the Orion replacement for the shuttle; we were part of a team that won COTS from NASA; we won the hydrocarbon boost liquid engine program from the Air Force; we won another $19 million high-performance liquid engine program at our Redmond, Washington facility; and all in all I think our success rate was close to 70% on bid and proposal requests that we sent out to our customers.

In terms of real estate, on December 8, '06 our Rio Del Oro, the EIR/EIS draft was finally published which now starts a clock ticking to where we hope and expect that we will have entitlement for Rio Del Oro prior to the end of 2007. Our properties continue to work their way through the entitlement project at Glenborough and Westborough.

And as a lot of you know, the real estate market is down in terms of new home demand in Sacramento. And so if anything is fortuitous it's the timing that we don't have product coming to the market right now. All in all we are happy with the year that we saw -- Aerojet and the real estate give to us in '06. And with that I will turn it over to Yasmin to talk about the financials for '06.

Thank you, Terry, and good morning to everyone. My remarks today will mainly be on the performance of our continuing operations for the full year 2006. The fourth-quarter results and full-year results on a GAAP basis are detailed in the release that we issued this morning. Today the Company reported a 2006 net loss of $38.5 million or $0.69 per share compared to net loss of $230 million or $4.21 per share for 2005. The Company also reported full-year 2006 sales of approximately $621 million compared to approximately $622 million for 2005.

Underlying these results is a profitable and growing aerospace and defense business and a real estate business that is making steady progress towards receiving entitlement and zoning changes on approximately 6400 acres in the Sacramento metropolitan area. Our continuing operations, particularly Aerojet as Terry noted, performed better in 2006 as a result of actions taken to strengthen and improve this business.

For 2006 the loss from continuing operations before the cumulative effect of changes in accounting principles is $39 million or $0.70 per share, the comparable amount in 2005 was a loss of $206.4 million or $3.78 per share. As you saw in the release this morning, our fourth-quarter performance for continuing operations was slightly profitable.

Both the 2006 and 2005 losses include a retirement benefit plan expense which is mostly non-cash. The amount in 2006 in total was $43.5 million compared to $47.8 million in 2005. As I noted before, most of this expense related to the deferred recognition of the under performance of pension plan assets in prior years and changes in the discount rate used to determine benefit obligations. We expect this expense to decrease significantly in 2007 to approximately $21 million in total. Our major pension plans have been and do remain in an over funded position still and we're not looking at any cash contributions on these plans.

Next I'd like to focus my comments on the performance of our two business segments -- Aerojet and real estate. From a sales perspective Aerojet experienced growth in numerous product areas including missile defense, tactical motors, satellite and space [cost] propulsion and NASA space exploration although annual sales in 2006 declined minimally to $615 million in 2006 compared to $616 million in 2005. This growth was offset by declines in the Titan and Atlas contracts as we've talked about before. We had minimal Titan sales in 2006 as the Titan launch -- as the last Titan launch was in 2005 and the 40-year plus program is winding down.

Atlas sales were lower as a result of the contract restructuring we undertook in 2005. Terry in his comments will address the growth potential for Aerojet as we go into 2007. We believe with its current product mix it is definitely poised for overall growth in 2007. Aerojet's segment performance for 2006, excluding environmental remediation provisions, retirement benefit plan expense and unusual items, was income of $61.2 million representing a 10% return on sales compared to a loss of $109.2 million in 2005.

As you know, margin improvement has been a major focus for Aerojet and we are pleased with the progress Aerojet is making. Needless to say, delivery of steady and improving Aerojet margins over the next few years remains a high priority and focus for us.

With regard to the real estate segment 2006, performance included sales of $6.5 million and income of $2.3 million compared to sales of $6.6 million and income of $3.9 million in 2005. Both year's sales reflect our normal ongoing lease activities and don't include any major real estate transactions. Terry will talk about the entitlement status of our various real estate projects in his comments.

Commenting next on our debt and cash flow positions, our net debt position, which is total debt less cash as of November 30, 2006, was $381 million compared to $352 million as of November 30, 2005 representing a net cash use for the year of $29 million. The cash usage for the year I'd like to break down into two parts. $10 million was used by continuing operations and $19 million was used by discontinued operations. The discontinued operations -- most of that related to liabilities that were accrued as of the end of last year in connection with the fine chemicals divestiture.

Looking at continuing operations, the cash usage represented payments for interest, legacy matters and these payments were offset not only by an approximate $18 million tax refund received in June of last year, but also cash generated by our Aerojet business unit despite the payment required for the $14 million settlement of -- the toxic tort liabilities and $13 million earlier on in 2006 for payments of tax recoveries received in prior years.

The Company has certainly made progress towards the objective of being a cash generator with Aerojet beginning to become cash positive in 2006. 2007 we will continue to focus our efforts in this direction with the objective of continuous improvement. As of November 30, 2006 we had cash balances of $81 million on hand of which $61 million was unrestricted. $20 million of restricted cash was from term loan proceeds received during the year that were used to cash collateralize the remaining 5 3/4 notes maturing in April 2007. And to the extent the Notes convert prior to maturity, will be used to repay term loans. We had no borrowings under the $80 million revolver on November 30, 2006.

Next I'd like to close with some comments regarding the status of our seller note and $6 million contingent purchase price payment that is associated with our divestiture of the fine chemicals business in December -- in November of 2005. As many of you know on the call, we divested that business last year and in return we took a note of $25.5 million and have the possibility of an earn- out of $6 million. In December 2006 we were notified by AMPAC that earnings costs for the 12-month period ended September 30, 2006 had been achieved by fine chemicals and that we were therefore entitled to collect the $6 million contingent purchase price which we viewed as a very favorable development.

AMPAC also recently announced that it intends to refinance its existing credit facilities, pay the earn-out and repay other indebtedness associated with the fine chemicals purchase, i.e. our seller note. We recently reached an agreement with AMPAC whereby we will receive approximately $29.5 million in cash and the release of certain liabilities in consideration for the seller note and the earn-out subject, of course, to AMPAC completing its refinancing activities and we hope to receive this cash payment in the first quarter 2007.

In summarizing 2006, I would say we have made a lot of progress focusing on our two core businesses with steady progress towards the entitlement of the 6400 acres and improved results and certainly improved prospects for Aerojet as we continue to strengthen and grow this business. We look forward to continuous progress, improvement and growth in 2007. With that I'd like to turn the call back over to Terry.

Thanks, Yasmin. I'm going to talk about 2006 and the trends that we saw in 2006 and then carry forward into what we're currently forecasting for 2007. 2006 was probably the year where we started to see space become more important to us as a business -- as part of our Aerojet business. The three areas that we focused Aerojet on over the last five years have been tactical missiles, defensive missile systems and space. And obviously with the conflicts in the Middle East we've seen our tactical missile business grow. And so it's not new news that that business is doing well.

Missile defense is something that we've been in and we are on every program; it's been another growth machine for us. And again, given the news of rogue nations -- Iran, North Korea -- it's not really a surprise that that area is doing well for us and continues to do well.

This was the year, however, that we saw NASA start really identifying what they're going to do to replace the shuttle and what their exploration programs are going forward. So what we saw this year is along with the other two areas growing we saw the shift in NASA resources and attention really going from the shuttle to the replacement for the shuttle. And in part, when Lockheed won the Orion program, which is the capsule that will go on top of Ares and be the new manned space vehicle for the United States. It was a combination of a lot of work that we've done in the past in order to get ready to be able to be in a position to take share in the manned space program.

Our space business is getting larger and, in fact, this year we had a number of launches. We launched the Pluto new horizon probe going all the way out to Pluto to do robotic exploration. We were a part of the solar terrestrial relations observatory or STEREO. We did the MiTEx mission. We did two Air Force GPS satellites. We were involved in two space launch -- space shuttle missions and five Delta 2 missions. At the same time we also announced that we won the propulsion system on the Orion and we are on a team that was awarded one of the wins on COTS. All that kept us busy at the same time we were seeing success on PAC-3 tests. We launched that and intercepted a target missile. And we had our eighth successful AEGIS missile test.

So all of that kept us relatively busy. And what we see going forward is we see continued growth coming from all three of those areas. And so we're looking for a relatively healthy year in terms of growth and margin improvement in 2007. What we've basically done is we've challenged our Aerojet group to say here are the objectives that we want you to meet going forward. We would like to see revenues grow faster than our marketplace and the way we've defined that is we've defined that as let's look at the revenue growth from DODs, procurement and R&D areas and also the revenue growth from NASA's exploration areas.

Next year we are forecasting those to be in the neighborhood of 6.1%. And we have told Aerojet that they have to exceed that. I can tell you right now they will exceed it in terms of revenue growth, the question being how much will be driven by how fast are the NASA programs rolled out and how much revenue did we get to add to our '07 forecasts based upon NASA programs. But right now I can tell you we should exceed that 6.1% quite handily.

The second thing that we've told Aerojet that we want them to do is we consistently want them to exceed 10% operating margins or segment income margins for the year. Again, this is something that we believe they can do. We've seen an improvement in margin this year. We were up to 9.9 for the year; we need to get better and to exceed that. Is it doable? We believe it is. It is not a slam dunk simply because most of the revenues that we're adding in 2007 are cost protected revenues which means they're going to be lower margins. But Aerojet has done a good job of taking out costs in their production programs and should continue to do so.

The third thing that we've told them they have to do is we want to see cash flow that exceeds 80% of their segment performance income. Now, is that something that we believe operationally they can accomplish in 2007? The answer is, no, we do not. And the reason is we still have about $15 million of negative working capital on the Titan program that has to be paid out or worked off in '07, the first half of '07. The second half of the year they should be at a run rate that excludes that, and so we will see better cash flows the second half of the year. Do we think they can be at 30% or better of segment performance in 2007? Yes. Do we think in 2008 they can get close to the 80% or better? We believe so based on everything that we currently see today.

Aerojet continues to grow. We have said that we want to be one of the three survivors in the propulsion industry. We are. Currently there's Alliant Techsystems who does large solids primarily and dominates that area. There's Pratt & Whitney Rocketdyne which does large liquids and dominates that area. And then there's ourselves who do both liquids and solids and we've focused on what are very technically hard, intellectually difficult programs which hopefully our customer can't do without. So we think we've created a business here that, subject to the marketplace and to the funding from its customers, is going to be around for a long, long, long time. And that really has been our strategic objective for as long as I've been with the Company.

Now let's move to real estate. In terms of our real estate business, as all of you know, it's a startup and it's one that we've been trying to give birth to for a long time, ever since we got superfund site property released we have been trying to get to a point where we could realize the value that our -- opportunity that our property presents. Because of its location and because of the fortunate series of events which basically put us in the Sacramento market in an infill location at a time where the forecast for the future population growth and job growth in Sacramento are still quite robust.

What we've discovered in the last five years of trying to get entitlement, it's a very difficult thing to do in California and it's probably why California real estate is so expensive. There's a lot of land here, there's very little land that's entitled for residential and mixed-use. And it's, as all of you can now testify, a difficult thing to accomplish. Where we are on Rio Del Oro, which is the 2700 acre project that is the lead project for us in terms of timing.

The environmental document, the EIR/EIS, was put out for publication December 8, 2006. That starts a clock ticking where they take comments, written comments, for 60 days. After that the city of Rancho Cordova, who is the entitlement authority, will cumulate those comments, respond to those comments and subsequent to that have their planning commission hold public hearings on the projects. And typically we are told there are two to four public hearings. Subsequent to that, assuming all the environmental issues are answered and fully vetted, we expect the city council to approve the entitlement.

Once that entitlement is approved there is an appeal period -- I believe it is of 60 days -- where someone could contest the adequacy of the disclosures in the environmental documents in a court. If it's not contested or if a court rules that it's adequate disclosure, then entitlement actually occurs.

Where we are in terms of pushing that is we are currently waiting for the comments and waiting to see what else we can do to help our friends at the city of Rancho Cordova with this process. Having said all that, we think that entitlement will occur and that sometime in the near future we will probably look to entertain partnerships with experienced developers or builders in order to have infrastructure put in, in order to have product to sell. If that occurs all along this timeline then we're talking about product being available to the marketplace probably 2009.

So we're getting there and we will see what the market does for us when we have product. But in the meantime, the same demands in terms of population growth and employment growth seem to be true here and we don't have a shortage of jobs -- in fact, Aerojet itself is going to add between 300 and 500 new employees in 2007. And so we're quite optimistic about the future of the property.

In terms of our other projects, the Glenborough project we expect to see the draft EIR/EIS out mid to late '07. It's being -- the timing is being driven by our ability to reach accommodations with the Department of the Interior on endangered species and the Corps of Engineers on wetlands and navigable waters in the United States. But again, it's moving along and we seem to be working quite well with the county of Sacramento who is the zoning authority on that project.

On the Westborough project, which is the last one that is fairly well along, 1700 acres -- there the city of Rancho Cordova is again the entitlement authority. And where that is I'm told they have selected the consultant to do the environmental review and have just basically commenced that project or that environmental study.

In terms of where do we think this company is going, obviously we're seeing improvement in margins, cash flow, revenues and we're also seeing the ticking off of time in order to get our entitlements. We think 2007 is going to be a better year than 2006 both in terms of earnings, cash flow and revenues. We think that we'll continue to see progress on the entitlements with the belief that we should absent some unexpected delay actually see entitlement occur in 2007. And we're all quite optimistic about the future for this company at this time.

So with that I think I will open it up for questions that anybody might have.

(OPERATOR INSTRUCTIONS). Joe Nadol, JPMorgan.

Good morning, Terry and Yasmin. It's actually Seth. Joe got stuck on jury duty so he couldn't make it. I guess just a couple of questions. Looking at sales, you mentioned Aerojet growing in excess of the addressable market at 6.1% with the potential for additional sales if NASA programs come online quickly. Can you sort of quantify what that extra sales growth could be so we'd be looking at a range from something slightly north of 6.1 to X? And also, how concerned are you about NASA's funding situation for FY '07 if NASA is funded at the FY '06 level as a result of a continuing resolution?

Those are both good questions, Seth. I think what we're seeing -- and again, a lot of this is going to, like I said, depend upon the efficiency and how NASA strides forward on the exploration. We could see a wide range in terms of revenue, but we think that to say that we're going to -- pick a number. So we could be anywhere from 150 to 200% above the 6.1. But it's going to driven by how efficient NASA is and Lockheed is in driving out the Orion program. Obviously funding is uncertain in terms of what is Congress going to allow NASA to do.

What we do know about funding is it's supported -- the NASA programs are supported well on both sides of the aisles, Democrats and Republicans. NASA is a very large organization and has a lot of votes in a lot of important districts, both Democrats and Republicans, and exploration and the replacement for the shuttle is the number one priority of NASA. So I think our concern isn't so much will the funding be there for Orion, our concern is how does it affect tangentially other programs where we may be doing R&D, will things get drawn out, what will NASA do in order to reshuffle their budget to try to make Orion happen in the time that's necessary.

I guess a question about cash flow as well. This was the second quarter in a row where cash flows were pretty good. It had seemed last quarter that maybe there would be a reversal this quarter and that didn't happen and we were just sort of looking at the outlook for cash flow in 2007 for the whole company. Is there a chance to be free cash flow positive next year?

There's a chance. I think when you look at it Aerojet and Yasmin's group have done a superb job of focusing on cash flow this year and it's the entire group, both together, that have got us to the point where we're seeing cash flows that probably are permanent improvements. For us to get, for the whole company to cash flow positive for the year it won't come just from operating cash flows.

Yasmin mentioned the impact note. If that gets paid down and Aerojet continues to improve its cash flows then there is a likelihood that we could see the Company cash flow in '07 which would be about a year earlier than what we've forecasted in the past. And again, it would require the impact note being paid off and it looks like that is something that is more likely than not to occur here in the first quarter.

On real estate I was wondering -- you mentioned the release of the Glenborough EIR. I guess if you could just give a little more color on that. And it seemed for a while that Glenborough was really catching up to Rio Del Oro and now it seems like it's going to actually be much further back. And also on Rio, is it still -- there's a date for the meeting in February and if you've been hearing any comments coming out during this comment period?

On Glenborough, every time we think we're making rapid forward progress we end up talking to a federal agency and they persuade us otherwise. Glenborough has issues, it's in a watershed creek, it also has some endangered species. And so there if it's slowed down it's basically more conversations with the Department of Interior on endangered species and/or the Corps of Engineers on floodplain issues.

Are any of the issues unsolvable? No. But what we are trying to do is we're trying to get global solutions for all our property. And so we are negotiating to get so we don't do it for Glenborough, then we have to do it for Westborough, then we have to do it for the Folsom SOI. We're trying to get a solution that's complete. And we're seeing some traction but it's never as fast as we would like. But having said all that we still see it occurring. I guess the question on -- repeat the second part of your question.

Just about Rio, if you've been hearing -- have there been many comments during the comment period? Have you been hearing --?

So far there hasn't been a lot, but we're not surprised at that. Typically the comments have a tendency to come in the last two days of the period. Why? I don't know, but that seems to be the practice that occurs. I guess so everybody can spend as long as possible thinking about what their comments are going to be.

Once -- the date that closes for written comments is August 5th -- February 5th, I'm sorry. February 5th. And then I think you really won't see much for a while because typically the zoning authorities take some time looking at the comments, drafting the responses to the comments. And so it will be some time after that date, the 5th of February, that we'll see some kind of notice for a hearing with the planning commission and the city of Rancho Cordova and we don't have an idea of when that will occur yet.

Great. And I guess the last question just about margins. And you had addressed margins going forward, but the 13% at Aerojet this quarter excluding the pension expense, what was unusual that was going on there?

What we saw there were some performance improvements across a number of different products that occurred in the fourth quarter tied to certain deliveries as well. Overall on a year-to-date basis we're looking at about 10% margins.

Right, and that's sort of how we're thinking going forward? And the 13 (multiple speakers)

Yes, our margins do vary quarter-to-quarter and a lot of it depends on what is going on within that quarter in the mix of the different contracts within the quarter. So I think a much better way to look at it is as you guys do on a full-year basis.

Thanks very much.

James Foung, Gabelli.

Good morning. Just a couple of kind of detailed -- maybe a little more granularity in the comments. Terry, could you give us the sales range you expect from NASA in 2007, what kind of revenues you think you might pick up? Maybe some sort of range?

I can't really give you a range. The reason being it's still fluctuating based upon what NASA is saying one day versus what they're saying the next day. It really hasn't pulled down to where we feel real comfortable giving you a range that would make any sense because we're not getting one from NASA that makes a whole lot of sense. I can tell you we're hiring at a rate which would suggest that -- let's say I have no problems saying we're going to exceed the 6.1%, but how high we're going to go I don't know to be honest, Jim.

Okay. In '06 though your business with NASA was about -- was it $5 million I think it was?

That was on the shuttle, yes. We do more than that with NASA since we do all their robotic exploration missions. But on the shuttle, the big opportunity was the shuttle is 700 to $800 million a year on propulsion is what NASA spends on the shuttle. And we only got $5 million of it because we do reusable attitude control systems on the shuttle.

With the shuttle being retired it means we're going to get to do a lot more propulsions systems that will be expendable as opposed to reusable and so we're going to see growth of that number. Now we've been telling people it could be $100 million or more in terms of revenues a year. That's going to take us until we get into production to be able to really give you an adequate number. All our work for the next couple years is going to be engineering.

Right. So over a longer-term basis you could see kind of $100 per year revenues?

$100 million, yes, or more. We would like to see our space business up in the 200 to $300 million a year all total. But whether we can get there or not, only time will tell.

Okay. I think shifting over to the Titan. Could you break out how much you did with Titan in 2006 and then in '07 you expect some sort of a final closing out of the program and I guess what kind of incremental increase you see in '07 here?

Jim, for Titan we were looking in '06 sales kind of about $10 million or so that we actually had. And in '07 we're probably looking at somewhere between 30 to $40 million in Titan revenue.

Okay. And after '07 that would pretty much complete then, right?

Yes, that would complete the closeout in '07 and the teardown of all the facilities.

Right. And this should be very high margin business because these are pretty much kind of closing out of the program with --?

Yes, this has got a nice margin associated with it.

I would assume it's better than your overall Aerojet corporate margin, right?

I think your assumption is correct.

Okay, that's good. And how about just on the Atlas motors? How much motors did you ship in '06 and then would you expect in '07?

We shipped six in '06, one each in the first and second quarters, two in the third and two in the fourth and we expect to ship eight in '07.

Okay. And then how is that going to break out by quarters? Do you have an idea?

Probably about two each quarter.

And again, with the renegotiated contracts, this should be much higher margin business than it was for you in '06.

In '08 and beyond, yes.

Is it in '08? But in '07 are you going to make money on the Atlas or is it just going to breakeven?

In '07 the restructuring, as you'll remember, that we did in '05 was essentially we would be in a breakeven position in '06 and '07. That being said, if performance is really good in '07 it has the potential to make some money.

Did you lose money in '06 from the Atlas or was that still breakeven --?

The Atlas program in '06, we had sales of about $50 million. Performance was good on Atlas in '06.

Okay, so you made money then in '06, okay. And then I guess lastly on the real estate, I know have current NOLs on the books from your previous sales of businesses. Would you consider selling chunks of land after you get where they are entitled sometime this year as these NOLs can shelter any capital gains (indiscernible)?

It all depends on where the market is. If the market is good we'd sell land, yes.

Well, I guess let's say today, if you had entitlement today, I mean would you sell parcels of the land to capture some of this --?

It depends on how much you want to pay for it, Jim.

So it's still kind of up in the air then, right? It just depends more on timing there, right?

It depends on market timing.

All right. That's all the questions I have. Thank you.

Robert J. Smith, The Center for Performance Investing.

Good morning. Could you put your thinking cap on and just give us an idea what you think the inference is of the Chinese missile intercept?

I can attempt to. Obviously the Chinese right now is the most aggressive competitor to the U.S. in terms of space and in terms of defense systems and missile systems. And to a great extent, when NASA talks about going back to the moon, they've got one eye on the Chinese who say they're going back. When DOD talks about missile defense and additional programs and when our friends in the Japanese start wanting to buy missile defense components, all of that is driven by the Chinese. And for us quite frankly the Chinese are helpful in terms of stimulating our marketplace. And for us we think it's going to continue. Whether Congress wants to or not they're going to have to continue to spend on the kind of products that we provide the country.

So for us it's something we keep an eye on. There are all these talks about having the Chinese come in and participate with NASA, and but right now we don't see anything that suggests that's likely to occur. And in fact, it's likely to stimulate missile and space spending in the United States as far as we can see right now.

So you do see the prospect of an escalation then?

Yes, we do.

Okay, thank you.

Joe Nadol, JPMorgan.

I just wanted to follow up with one question. You had mentioned, Terry, looking shortly at partnering with a developer on monetizing some of the real estate. And is the time frame for that -- has that tightened up since the last call and have you seen any more interest from developers since then?

I think there are a couple of questions there, Seth. The first is where developers are kind of driven by where they see the market place. Right now they're searching for where is the market, has it hit bottom, has it not and so they're uncertain as to what the future is and so their responses have been uncertain.

In terms of timing, obviously we have something that has a lot more value if it's entitled than if it's not. And so I think any kind of timing is going to be driven by where we are on the entitlement process and do we have entitlement. And then the second piece is simply going to be driven by the marketplace and what do people see as the opportunity.

We haven't talked to anybody who doesn't think California real estate is going to come back or that Sacramento is not going to be a great market over the long run. I also haven't found anybody who can tell me definitively that the market has hit bottom or the market is going to hit bottom in three months or six months. What everybody is saying is sometime within the next 12 to 24 months we'll start seeing the market turn back up and so that's going to drive what we do.

Thanks.

(OPERATOR INSTRUCTIONS)

All right, if we don't have any additional questions, thank you all for being on the call and we will talk to you soon. Good day.

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