Aerojet Rocketdyne Holdings Inc (AJRD) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the GenCorp first-quarter 2007 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 today, Wednesday, March 28, 2007.

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

Thank you, Holly, and good afternoon, everyone, and welcome to GenCorp's first-quarter 2007 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 first-quarter earnings release, as well as Management's Discussion and Analysis and elsewhere in our most recent Form 10-K and other filings with the SEC. These statements and factors could cause business conditions and actual results to differ materially from those expected by the Company or expressed in our forward-looking statements.

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

Thank you, Linda, and good morning. I'm going to make a few comments, and then I'm going to turn it over to Yasmin to discuss the financial results of the quarter.

We had a couple of things that occurred today, actually. One, we had our annual meeting, and two, we released earnings on Q1.

In terms of the annual meeting, basically, the things that we put to vote to the shareholders passed, including destaggering the Board, amending the articles to provide that the Ohio Control Share Acquisition Act does not apply to the Company, amending the act to formally provide for the appointment of nonexecutive Chairman in the -- for good corporate governance, and the election of the slate of officers that stood for election. Going forward, all of the directors will stand for election every year. And so each of us have a single one-year term.

In terms of the quarter, I guess I would say we are relatively pleased with the quarter. Obviously, we started off telling people that it was our intent to see a fair amount of growth this year. We kind of set the floor at 6.2% growth based on what NASA and DoD are growing their budget at in the areas that we play.

We started off at 18% growth year over year, though I must admit that last year the first quarter was a relatively weak revenue growth. A lot of that growth, we will talk about where it's coming from, but in big terms, first quarter, a lot of the growth came from missile defense programs, and obviously, some growth coming from new NASA wins. So the NASA revenues should show up more later in the year as opposed to the first quarter.

In terms of our objectives for the year, we have said that we wanted to be growing at much more than 6.2%. In revenues, we wanted to see Aerojet cash flow quite positive. And we wanted to see operating margins, excluding our noncash items, which are pension and movement in the environmental reserve, to see the margins at in excess of 10%.

We did have relatively good cash flow in the quarter. Again, Aerojet did a good job for a quarter that is traditionally their worst cash flow of the year to manage their working capital. And that helped our cash flow. We also obviously had the AMPAC note repayment that Yasmin will talk about in a minute.

On margins, we were short of our 10% goal. We were roughly at 9.5% or 9.6%. So we still have some work to do there. Having said that, we believe that we are well positioned for this year, and we should see growth continuing, and we should see margin improvement as we go forward.

With that, I will turn it over to Yasmin to go through the numbers.

Thank you, Terry, and good afternoon to everyone. Today, the Company reported the first-quarter net income of $28.5 million or $0.51 per share compared to a net loss of $16 million or $0.29 per share in the first quarter of 2006.

The 2007 numbers do include from discontinued operations a $31.2 million gain, which was generated through the early negotiation for the early retirement of the [av] note that we received when we sold the Fine Chemicals business to AMPAC and also an associated earnout. And that transaction, as many of you may recall, happened in November of 2005. Needless to say, we were very pleased with the negotiation of that and getting those cash proceeds in, in the first quarter.

We reported a first-quarter loss from continuing operations of $2.1 million or $0.04 per share compared to a loss from continuing operations before the cumulative effect of a change in accounting principle of $14.3 million or $0.26 per share in the first quarter of 2006. As I have noted in previous calls, both the numbers for these years included retirement benefit plan expense, which is mostly noncash.

The amount in the first quarter of 2007 was $5.3 million compared to an $11 million number for the same period in 2006. Most of this expense is still related to the deferred recognition of the underperformance of pension plan assets in prior years and past decreases of the discount rate used to determine benefit obligations.

And the reduction in the expense in 2007, which we are certainly happy with, is primarily related to an increase in the discount rate used to determine the obligations. Our major fund pension plans have been in an overfunded position and will remain in an overfunded position, as far as we can see in the near future, with no cash contributions required.

I would like to turn my comments next to the performance of our two business segments and their results. Aerojet -- Aerojet's sales for the first quarter were $149 million, up 18% compared to $127 million in the first quarter of 2006. This increase comes from a variety of space and defense programs and included Standard Missile, Orion, and the Titan program.

Aerojet's segment performance for the first quarter, excluding environmental remediation provision adjustments and retirement benefit plan expense, was income of $14.3 million, representing a 9.6% return on sales. This compares to $8.3 million and 6.5% for the same period in 2006. So we can see an improvement here, certainly.

The year-over-year increase and improvements reflect higher sales volume and favorable contract performance. As we have noted before and talked about, Aerojet's margin improvement has been a major focus of the Company, and we are encouraged by Aerojet's progress in this area.

Our stated target is consistent annual delivery of operating margins that exceed 10% on an annual basis. Given the good start to the year and the good performance in the first quarter, we believe that we are well positioned to meet this target for 2007.

With regard to the Real Estate segment, first-quarter performance included sales of $1.7 million and income of $0.8 million compared to sales of $1.5 million and income of $0.8 million in the first quarter of 2005. Both years' sales reflect our normal ongoing lease activities and do not include any real estate transactions. I am sure Terry in his comments will talk about the entitlement status of our Real Estate projects.

Commenting next on our debt and cash positions, our net debt position, which is total debt less cash, at February 28, 2007, was $371 million compared to $381 million at the end of November 2006, representing net cash generation of $10 million for the quarter. This $10 million number does include receipt of $30 million of the proceeds related to the seller note and also the earnout that we had on the divestiture of the Fine Chemicals business in 2005, and was partially offset by net usage of $20 million by our continuing operations.

The cash usage reflects Aerojet at a breakeven position for the quarter, interest payments of $9 million, the balance of cash usage being for real estate, corporate, retiree medical, and legacy matters. Aerojet has certainly made measurable improvements in its ability to deliver cash while dealing with legacy constraints like the repayment of Titan advances as that program completes, funding of toxic tort settlements and the Company's share of environmental costs.

With this progress, we expect the Company to be cash positive for 2007. And we will continue our effort to improve cash flow further. As of February 28, 2007, we had cash balances of $94 million, of which $74 million was unrestricted. We had no borrowings under our $80 million line of credit at the end of February '07.

In summary, I would like to say that financially, we had a good quarter. We are pleased with the results, and we continue to make steady progress towards improving these results further that will continue to help grow and strengthen the Company.

With that, I would like to turn the call back to Terry.

Thank you, Yasmin. I am going to then give you some comments on what we are seeing both at Aerojet and what we're seeing at our Real Estate business and where we are on our projects.

In terms of Aerojet, everything is looking quite optimistic at the moment. And it is really a function of -- we're seeing greater orders in the missile defense area, as I spoke earlier. We are also seeing increased scope in our new NASA programs, and so we're still negotiating pricing and cost numbers on the additional scope.

What I can tell you, at least on the missile defense business, this quarter we were awarded a significant contract on Standard Missile to do the Divert Attitude Control System on that. It is a throttable Divert and Attitude Control System. That's a solid which allows us to increase and decrease the burn rate of the solid -- of the DACS system, which basically gives it more flexibility in terms of range and mission capabilities.

The contract is significant. In '07, it is going to be about -- I think we are starting at about a $58 million contract. We'll see whether the Missile Defense intends to spend all of that this year or whether they are going to have to stretch some of that spend because of budget considerations.

And what is particularly significant about this contract, other than it is a nice win and it is a development contract, is that we are replacing an incumbent on the program, which is one of our competitors. And that rarely happens. And the reason that we are replacing them is that our technology does things that their technology is unable to do.

So you rarely replace an incumbent on an existing program in our business. So it is very significant. It is going to be a development contract that runs through 2010, and it is somewhere in the neighborhood of revenues of $125 million over that period.

The other things that we're seeing that are significant -- we told you that we've been in the process of negotiating the '08 and '09 buys on Atlas V. We have reached a memorandum of agreement. We don't have a signed contract yet. Basically, our goal there was to get double-digit margins, and we haven't backed off that objective in reaching agreement on the pricing of the '08 and '09 buys of Atlas V boosters.

And that's somewhere in the range of $35 to $45 million a year in terms of revenue. That's going to go from currently zero margins to standard production margins, which we've told you in the past are between 8% and 12% for production programs. So it is again another reason why we think we will see good margins going forward when we get into 2008, 2009.

And finally, on Aerojet, obviously a lot of our growth over the last few years has come from missile defense and from the tactical missile side. It is still coming from particularly missile defense in the first quarter. But we are also saying that most of the future growth, or a lot of the future growth, is going to come from the NASA programs that we won.

And where we are on the NASA programs, we told you that we were negotiating. What we are again seeing there is an increase in scope, so an increase in the amount of work that our customers want us to perform. We are still negotiating what that increase is going to be and what the pricing is going to be on that.

Where we are on the first set of contracts that we negotiated with NASA is it looks like it will provide somewhere in the neighborhood of $40 to $50 million in revenue in '07. And that is ignoring, out of those numbers, that is ignoring anything to do with the COTS program. And we would expect to see margins in the range that we normally get in terms of development programs, which I think we have said in the past is a fairly wide range, between 6% and 12%.

And so all of those things look very good for Aerojet. And as Yasmin said, Aerojet has also done a particularly good job of managing working capital and improving their cash flows. So we are very optimistic about what the rest of the year is going to look like for that segment of our Company.

In terms of Real Estate, where we are is on our programs, the first project in terms of entitlement is the Rio Del Oro project. That is around 7,000 homes, 2,700 acres of property.

As I think we told you the last time, the Draft EIR/EIS was published December 8. The comment period has expired. The city of Rancho Cordova, which is the entitlement authority there, is currently going through the comments and deciding how they're going to respond to those comments and whether there will be any changes in the final draft -- the final approved EIR/EIS.

We expect to hear what they want to do on that draft sometime in the next 60 days or so. And then there are a series, at least one, perhaps more, of public hearings that need to be called with 10 days public notice. And we don't see anything right now, and to be honest, we haven't seen all the comments, but we don't see anything right now which would suggest to us that this project will be -- timing will be negatively affected. And we're still currently predicting or forecasting that we're going to see entitlement approved by year end.

The other project that is moving along is our second project. It is Glenborough at Easton. Glenborough is 1,400 acres, a little under 5,000 housing units, and a lot -- I think somewhere in excess of 100 acres -- of commercial retail office.

Where that is in terms of the entitlement process, the County of Sacramento, the zoning authority for that piece of our property, is currently in the process of wrapping up the draft of the EIR. We are anticipating, absent, again, any unforeseen delays, that we should see the draft out sometime this summer. And again, we are predicting sometime within the next 12 months that we will see final approval of the zoning for Glenborough.

The rest -- the other two of our projects, Westborough, 1,700 acres, is about a year behind in terms of where they are. And again there, the zoning authority is the City of Rancho Cordova.

And then we have another project, which is called the Folsom Sphere of Influence property. It's about 625 acres, which I think we are now going to name or brand as [Hillsborough], which is probably 2010 or sometime thereafter. It is harder to forecast simply because it first needs to be annexed by the City of Folsom, which, again, is a very time-consuming and intricate process here in California.

Where we are in terms of the marketplace is still looking for whether we have reached the bottom of the market here in Sacramento. There's been some good news and some bad news. Sales have been increasing in terms of used housing in the marketplace. New home sales have been relatively static. And so we are still waiting to see what is going to happen in terms of where the market is and where the market is going.

In terms of when we would have product for at least the home market, the new home market, the earliest it would be would be sometime in 2009, based upon our current schedule.

Are we still optimistic about the future of the real estate business? Yes. There is nothing that, again, has changed in terms of forecasting, demand, or population growth. And job growth in our area and in our submarket here, in the Highway 50 corridor area of Sacramento, it is still -- the estimates we're still seeing there is 2.7% annual compounded growth, both in population and in jobs.

So while we don't have a lot to say that things have changed in Real Estate, we're still making progress. We believe that the entitlement is going to happen. And we're trying to make sure that we don't see or that we remove any obstacles to meeting the timelines, though not all those obstacles are obviously in our control, simply because in two cases, it is the City of Rancho Cordova that is doing the Environmental Impact Review and will have to grant the zoning, and in the other case, it's the County of Sacramento.

With that, I think I would open it up for any questions that anybody might have.

(OPERATOR INSTRUCTIONS). Joe Nadol, JPMorgan.

The first question is on sales, the sales outlook. It sounds like the NASA plans are crystallizing a little bit for this year. Do you think you can do double-digit sales growth for Aerojet this year?

I would say absent a large change in the environment we're in, that is probable.

Okay. On cash flow, secondly, any update, Yasmin or Terry, on what we can expect for free cash flow for the year?

I think if you look at it, counting the AMPAC note for the year, we expect to be in a cash flow -- we will be in a cash flow positive position for the year for the Company. And without the AMPAC note, I think that target is a challenge. But we're certainly working towards that objective. But certainly, including the proceeds of the AMPAC note, we are cash flow positive for the year.

So that is $30 million, roughly. So we are shooting for $30 million free cash flow and we're saying definitely it is going to be more than zero.

If you include the $30 million, it is definitely, we are generating cash. Okay? But if you didn't include the $30 million, then I would say we're using cash. And our goal is to get to -- we would like to get to a breakeven basis.

What were the things that helped out Q1, ex, obviously, the AMPAC note?

I think we have had a lot of improvements at Aerojet in terms of their working capital improvements, collection of cash flow on billings, and just general overall improvement in billing turns and collections, discussions with customers, negotiations with customers.

So when you look at the rest of the year and what happened this quarter and the second half of last year also was -- you turned the corner on some of the cash generation metrics, I think -- how much of it is -- is there anything that is going to reverse, do you think? We've gotten through the worst quarter of the year seasonally. How much more opportunity do you see?

We won't see any reversals. And now, our goal is to see what can we build on it. Obviously, the goal that we have talked about is we would like to get cash flow for Aerojet equal to 80% of segment performance. Is it going to get there in 2007? No. But it is certainly well on its way to that. And I -- can it get there in later years? Will it get there in '08, '09? We certainly think so.

And then one question on the Real Estate. It sounds like things are generally on track for Rio Del Oro. And we're now getting -- it's getting interesting as we are -- it's been a long wait. But we are --

That is being kind, Joe.

Yes. It seems like we are getting within -- we can count the number of months on maybe one hand or maybe we go a little bit into the second hand, but it is coming up.

When you think about the market still being obviously pretty weak, but this is a cyclical business -- it takes times to make the investments necessary, the infrastructure investments necessary to prepare yourself. What are the things that you have to do, or start thinking about doing so you don't -- so you are fully prepared and don't miss the beginnings of a recovery in the market?

I think, obviously, what we're going to have to do is decide, one, are we going to put in infrastructure, which we are not in the business of doing right now, or two, are we going to bring in a partner. And partners -- the usual suspect for partners has gotten smaller simply because you don't see a lot of builders now trying to accumulate lots (technical difficulty) inventory.

But having said all that, really the basic business decision of us or a partner is going to be driven by what is the market forecast and which segment of the market is going to recover the fastest, along with facts like do we have one piece of property that is less expensive in terms of infrastructure, so you're putting less investment in than another piece of property.

So for example, what I think the real question we are going to face -- ignoring whether we are doing it or somebody else is going to do it, which is a decision we haven't made -- is when we have the entitlement, we're going to get entitlement hopefully, if we are on schedule, of both Glenborough and Rio Del Oro at almost within six months of each other.

The question is, does the market support us putting in, or anybody putting in, an investment in the infrastructure in Rio Del Oro, because that is going to be a lower-priced product and the location isn't as good because it is farther away from the highway and from access and from the light rail station.

Or do you -- is it a better investment or a lower investment to put it into Glenborough and put in infrastructure there and let that be the first project, because, for example, that is a higher product in terms of markets, in terms of what you're going to sell the end product for. Will that market segment recover faster? And at least everything that we see would suggest that the infrastructure costs are less because you have less distance you have to run services.

I think that is going to be the issue that is going to have to get addressed. And it is going to be one that is driven by the economics of the marketplace and what we see going forward, and it's a decision we're going to have to make probably late this year.

So in the past, Terry, you have said it is pretty much -- think about it being a year between starting to add infrastructure and when you can have lots available for sale.

Yes.

You're saying now, though, that sort of '09 is really the first time you can have lots available. And we're still expecting '07 entitlement for Rio Del Oro. So are we basically saying at this stage of the game we're not going to -- we are definitely trying to get Rio Del Oro done absolutely as soon as possible, but we're not going to start work on it and even start thinking about it, really, until we get into '08?

I think we will think about it sometime late this year. And like I said, the question is going to be, what is the market forecast? Because if there is no market, there's no reason to put in infrastructure, obviously.

And two, the second thing is we're not going to put in, or I don't think anybody would put in, infrastructure on two projects at the same time, Rio Del Oro and Glenborough.

So I think there's also going to have to be a choice as to whether you pick Rio or whether you pick Glenborough as being the least amount of risk for the most amount of reward for anybody. The market is not so robust here that you're going to sell a lot of lots that you really want to put in more investment -- twice the investment or more than twice the investment at the same time.

And just finally on this note, how would you characterize any conversations with potential partners? Are things still dormant? Or has there been any sort of glimmer of activity?

It is always ongoing. We get contacted all the time. There are still some builders that are interested. And there's still some people who do land development who are interested. A lot of it is simply driven by what people's view of the future is. And that doesn't seem to be consistent among all these different classes of potential partners.

Jim Foung, Gabelli & Company.

Just getting back to, I guess, first question on Aerojet -- just trying to get an idea of what 2008 might look like. It seems like you have a couple of programs that may begin in the latter half of this year, if they get pushed out a bit or start in '08, and those are the Atlas as well as the NASA. First question is do you think you could continue the double-digit growth in 2008 and what do you think the margins might be?

I would tell you we don't have as good of clarity on what 2008 is going to be. And that is driven mostly by what -- excuse my profanity -- what the hell the Congress is going to do on funding on DoD and on NASA. What we're seeing so far is DoD funding seems to be remaining relatively robust simply because both sides of the aisle support missile defense. They're still using tactical missiles.

And NASA, it's a question of whether -- how much money are they going to get and will they have enough money to spend on everything they want to spend it on. And that is true for all of our customers. And generally, the answer is no, they don't.

So we're still trying to deal with particularly NASA and the COTS program, I should add -- are difficult for us to forecast because our customer can't forecast it, because they don't yet know what money they are going to get. And that is all going to be part of the political process.

I think what I can say, and -- so what I can say is I think we are in enough programs that are significant to the customer, the government, whether it is NASA or DoD, that we don't really see much downside in what we have. We don't really see much risk of it -- of any precipitous slide in revenues.

I can tell you, just if you do the math and if you look at the size of our industry and if you are assuming that the revenues aren't going to grow at double-digit rates, and I don't think they are, we can't continue indefinitely to have double-digit growth because at some point in time, we are just not going to be able to get any more market share.

Right now, what I understand is that our competitors are forecasting low-single-digit type of growth. And I can tell you we are forecasting much higher than low-single-digit type of growth. Most of it is going to be driven by world events. As you know, before North Korea sent up their missile test, national missile defense was going to be a bill-payer for Iraq. Nobody is talking about that anymore. In fact, missile defense got plussed up.

So a lot of it is outside of our ability to forecast, particularly world events. But having said that, we just don't see much downside in the portfolio that we have. Whether it is a wildly different view or not from Congress, we don't see -- if you look at what we are addressed -- the threats we are designed to address, we don't see terrorism declining. As a citizen, I wish it would. As the CEO of this Company, it has a different effect.

We don't see rogue nations not being rogue. And we don't see the U.S. not being deeply involved in space exploration. So we think we are in a good defensive position. And we think there's upside. But I don't know whether we can do double digit in '08 right now.

But without any -- if you don't think you see much downside in '08 on your base business and then you see some growth as you layer the NASA and the Atlas business on that in 2008, then, right?

Yes, that is true, though on the downside, Titan pretty much is done in 2008. There's a little work, but there's pluses and minuses again. And ultimately, do we have the product that our customers want? And we think we do.

But at what -- the difficulty is, our customers all always tell us they want more than what they can afford. And so we somehow have to judge how much funding are they really going to get. And that is really -- that and world events will dictate -- whether there is suddenly another event someplace, if there's something that happens in Iran that's much more serious than what we're seeing today, then yes, we're going to continue to grow pretty good. If it doesn't, then we won't grow as much.

And I can't tell you whether those are going to happen. All we can do is basically put ourselves in a position to take advantage of them in terms of revenue and income if they do.

Right. Great. And then just shifting over to real estate, you still have some net operating losses from your sale of the automotive business years ago. Could you just comment on how you plan you might use these NOLs? Would you consider selling real estate to kind of take advantage of some of these NOLs?

Obviously, we always look at after-tax economics when we make any decision. So if the market is such that makes sense, we would certainly do that. Having said that, most of our NOL is an ordinary loss NOL. And we've got 20 years to use it. And given what we're seeing in Aerojet's performance and what it looks like they're going to do in future years, we think Aerojet is going to use up a lot of those ordinary NOLs.

So it would not necessarily be used to offset land sales?

Doesn't necessarily. If we have profit there, and we think we will, it can be. So we're going to use it to offset tax obligations, wherever the IRS permits us to do so.

(OPERATOR INSTRUCTIONS).

All right, if there's no further questions, we will sign off here. And we will talk to you in about three months, and hopefully we've got even better news when we talk to you at the second-quarter call. Thank you all for attending.

Ladies and gentlemen, this conference will be available for replay after 6:30PM Pacific Time today through Friday, April 13, 2007, at midnight Pacific Time. You may access the AT&T Executive Replay System at any time by dialing 1-800-475-6701 and entering the access code 868848. International participants may dial 320-365-3844. (Repeats numbers).

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.