Aerojet Rocketdyne Holdings Inc (AJRD) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the GenCorp 2007 fourth quarter and year-end 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, January 24, 2008.

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

Thank you, operator, and good morning, everyone, and welcome to GenCorp's fourth quarter and year end 2000 conference call.

Before we start, I would 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 earning release we issued today, 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.

And with that, I would like to turn the call over to our host, Terry Hall.

Thank you, Linda, and good morning, everyone. Today we released our fourth quarter earnings and year-end earnings for 2007. I would like to say that we had an excellent performance, particularly out of our Aerojet operation for the entire Company. Our revenues were up 20%, and that's all organic growth. Aerojet segment performance before environmental and pension non-cash expense was up to $85 million or an operating margin of about 11.5%.

Real estate turned in a performance of $3 million in segment performance. There was a reduction in corporate costs of about $4.5 billion year-over-year. And all in all, we consider this a successful year for the Company.

Yasmin is going to take you through the numbers and talk about the year right now. I will come back on the line and give you a little more flavor for 2007 and talk about what we see for the future going forward for the Company. With that, I'd turn it over to Yasmin.

Thanks, Terry. And good morning to everybody. Let me first reiterate Terry's comments here and start by saying that the Company is pleased with both the 2007 fourth quarter and the full year financial results that were included in the release that we issued earlier today.

Sales, income and earnings per share improved significantly quarter-over-quarter as well as year-over-year. In addition, we were able to increase our cash balances, decrease our net debt position from the beginning of the year, and in the process, substantially improve our year-end liquidity position. My following comments will touch on each of these areas.

Sales for the year were $745 million, up $124 million from 2006 sales, representing a 20% year-over-year growth. This increase reflects higher activity in a variety of space and defense programs, most notably Titan, Orion, and Standard Missile.

As in the past, we don't provide sales and income forecasts, but looking ahead to 2008, our goal is to replace the Titan business, which goes away in 2008 and in 2007, accounted for approximately $30 million in sales. And we intend to replace this with our missile defense programs and the continued development of our Orion efforts.

Next I'd like to comment briefly on segment performance, which is a non-GAAP financial measure and is defined in the operating segment information table included in our earnings release that we issued earlier today. Segment performance for the year improved year-over-year with solid performance at Aerojet. Aerojet's segment performance for the year excluding environmental remediation provision adjustments, retirement benefit plan expense, and unusual items was $84.8 million, representing an 11.5% return on sales. This compares to $61.2 million and a 10% return on sales for 2006. The year-over-year increases reflects higher sales volume and favorable contract performance at Aerojet. As we noted in our earnings release, margins were helped by our Titan close-out activities that are now complete.

Looking at the real estate segment, sales for both 2007 and 2006 reflect our normal ongoing lease activities and did not include any real estate transactions in either period. Segment performance for real estate was $3.5 million for the year compared to $2.3 million in 2006.

Commenting briefly on the other components of continuing operations income, our combined interest expense and interest income is flat year-over-year at $23.7 million in 2007 versus $23.6 million in 2006. Corporate and other expenses were lower in 2007 as compared to 2006 at $19.7 million in 2007 versus $24.2 million in 2006. The improvement reflects lower legacy Workers' Comp costs in 2007, partially offset by increased future environmental remediation costs and the fact that the 2006 numbers included higher expenses related to the election of the Company's directors in that year.

As I have commented throughout the year, retirement benefit plan expense, which is mostly non-cash, was $21.6 million; about half of the expense in 2006. The decrease reflects the impact of higher discount rate assumptions and favorable market performance. Based on our latest actuarial projections, we are looking at a net expense in the $7 million range for this line item in 2008. At this point in time, our major pension plans have been in an overfunded position, may have changed a little bit with the market conditions over the last couple of days, but certainly when you close the year out, they weren't in an overfunded position and we're not looking at any cash contributions in the near-term.

We recorded income tax benefits in both 2007 and 2006 -- $18.1 million in the current year and $4.7 million last year. The increased benefits in 2007 are due to favorable federal and state tax settlements for research and development credit claims, manufacturer's investment credit claims and certain statute expirations.

We also had good result from our discontinued operations in 2007, where we were able to negotiate an early retirement of our seller note and also collect on an earnout payment associated with the sale of our fine chemicals business back in 2005. As a result of that, early in the year, we recorded a $31.2 million gain, and for the full year, we were in the black -- we were on the positive side, both for discontinued operations, $27.9 million in 2007 and $2.4 million in 2006.

All of these elements that I've just talked about contributed to a good year with regards to income performance. For 2007, net income was $69 million or $1.14 of diluted earnings per share compared to a net loss of $38.5 million or $0.69 per share in 2006.

At this point, I'd like to make a few comments regarding the disclosure included at the bottom of the condensed consolidated statement of operations included in the earnings release this morning regarding our diluted income per share calculations reported in the second and the third quarters of 2007.

We identified an error that incorrectly included our 2.25% debentures in the fully diluted share count and thus, the fully diluted net income per share computation. Because of the net share settlement feature in these notes, any shares issued upon conversion of the notes are included in our fully diluted share count only if the market price of our common stock exceeds the conversion price, which is at $20. As a result of this, diluted net income per share was understated by $0.01 in the second quarter and $0.02 in the third quarter. All other reported amounts during the year were correctly stated. Management has concluded the errors are not material to the financial statements for those periods and that the Form 10-Q filing for those periods can continue to be relied upon.

Next, turning to our net debt and cash flow positions, net debt, which is total debt less cash as of November 30, 2007 was $354 million, a $27 million improvement from $381 million as of Novembers 30, 2006. The improvement reflects the cash proceeds from the early seller note collection and earn out payment related to our fine chemicals sales, cash generated by Aerojet for the year, and cash tax refunds received during the year, partially offset by expenditures associated with the process of obtaining our real estate entitlements as well as costs related to corporate interest, retiree medical and legacy matters.

Touching on a few cash metrics for 2007, net cash provided by continuing operations was $26.2 million. D&A was $28.4 million, capital expenditures were $21.8 million. Net cash used in discontinued operations was $2.4 million. Net cash provided by investing activities included $29.7 million related to the early retirement of the seller note and the earnout.

We ended the year in a strong liquidity position with cash balances of $92.3 million, on undrawn revolver of $80 million. Fortunately, in June of 2007, prior to the current market situation -- credit markets -- we amended our senior credit facility, which provided the Company with more flexibility, extended debt maturities, and served to lower our interest costs going forward. We also added additional letter of credit capacity.

In closing, once again I'd like to say we are pleased with our 2007 financial results. We achieved and exceeded our financial goals for the year. As we look forward to 2008, we will continue our efforts to improve margins, generate cash, and continue to grow and strengthen the Company.

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

Thank you, Yasmin. As a lot of you know who followed the Company for a number of years, we have been continuously pushing this Company -- and particularly the Aerojet portion of the Company -- to the position that you're finally seeing achieved in 2007. Cash flow, positive cash flow, revenue growth, strong position going forward in various important programs to both the Department of Defense and to NASA, all resulted in us seeing this year really the corner being turned in terms particularly of cash flow.

And one of the things I can say to you is thanks to the hard work of all of our employees, we're at the point where right now we see positive cash flow being consistent going forward and improving, hopefully, each year as we go forward.

When we started '07, as Yasmin said, we had a number of objectives. We wanted to grow Aerojet's revenue at a rate faster than what we were seeing in our markets at NASA and at DoD. We actually tripled the growth rate of those markets this year with a 20% increase in revenues. A lot of that was driven by getting the award on the Orion program. And I can tell you that we have now definitized our contract on Orion with Lockheed. And so we're looking forward to the next several years seeing increased spending on that program.

At the same time, we had an objective for the Company, obviously, to cash flow. And cash flow was positive. And we expect, as I said, better cash flow in 2008 from continuing operations than we saw even in 2007.

In terms of where we think the Company is going in 2008, we historically have not given detailed forecasts. We have talked about where we expect revenue to be. I would tell you what we expect in 2008 is fairly flat revenues for Aerojet. We expect right now, looking out and what we can see that Aerojet's revenue growth will start to grow again in 2009.

In terms of real estate, we didn't spend much time talking about real estate. Where we are today is we're still on the schedule to see entitlement of Rio Del Oro and, hopefully, Glenborough in 2008. The markets, the real estate market in Sacramento is quite in the tank right now. And so it is hard for us to say beyond entitlement, whether we will be investing additional monies. And we have not made a decision on infrastructure once entitlement is achieved on those two projects. Right now we're waiting to see exactly what the market is going to look like, and the Board will make a decision when we have an adequate forecast predicting when the real estate market in Sacramento will come back.

Having said all that, we are extremely pleased with the performance of the Company in 2007. And we expect this trend of improved performance and cash flow to continue in 2008.

With that, I'm going to open up the line for any questions that you might have.

(OPERATOR INSTRUCTIONS). [Steven Neesan], Mindflow Capital Investments.

Terry and Yasmin, congratulations on a solid year and good luck to you both in the future. A couple of questions. Regarding operational improvement initiatives, what are you guys doing around lean manufacturing in keeping in the Six Sigma? And what kind of benefits are you seeing regarding that in your bottom line?

We focus on those a lot and spend a lot of energy at Aerojet and have all of these operational excellence improvements in place. I think the 2007 results reflect those improvements. We constantly look at program by program and initiate different improvements along those lines.

To some extent in the government business, when you do get these margins, depending on whether the contract is a fixed-price or a cost related contract, sometimes you can see those translate right to the bottom line and sometimes they don't translate right to the bottom line. But we are very focused on it, have a great team working on it constantly. And we're going to see the efforts as we go forward.

Companies similar to yours are looking at certain metrics to figure out how efficient they are. What metrics are you guys managing in your manufacturing process to make sure you're as effective as you can be in terms of -- are you looking at OE, RONA, those types of metrics, so that way you could see if your throughput is as efficient as it should be, so you stay the leader in the industry?

We look at -- one of the big ones we look at is year-over-year cost improvements. And those we follow quite closely on individual programs. As Yasmin said, one of the issues that we have is about 46% of our contracts are fixed costs, which basically means we get to keep about 46% of cost reductions. On cost-plus contracts, we obviously don't get to keep any of the cost reductions. And on particular programs, Scott Neish, who is the president of Aerojet, has targets for the reductions for that particular program for a year. And it's primarily achieved, as you've already said, through Six Sigma and lean manufacturing. So I would say the most significant metric is just year-over-year cost comparison.

And so is throughput not as important to you specifically or --?

It's not, because a lot of things don't have the kind of volumes that you would typically think of as a manufacturing company.

Okay. And another question, regarding your continuous improvement initiative -- while I really like what I'm hearing -- what systems or solutions are you going to be putting in place going forward this year and next year to make sure you guys stay a leader in the market, the return on your assets, benefits throughout your organization to make sure all your divisions are functioning at top rate speed?

We're going to continue the process that we are following right now and make sure we keep measuring it and monitoring it.

And final question -- for the remainder of the year, Terry, as CEO of GenCorp, what's the number one thing you want to accomplish so you could tell all your shareholders right now on the call that we all can have a trust base going forward, you're going to do your best to improve shareholder value and maximize everybody's wealth and make sure GenCorp stays a leader?

I think the answer to that question is two things -- we want to continue the growth of Aerojet and the improvement in cash flow of Aerojet is very important to us. And we want to get real estate entitle. So you almost have to look at the business with two lenses. Obviously, Aerojet is in a very nice position with its domination of in-space propulsion and its number one position in tactical missiles. We expect to be able to lever that going forward to get additional revenues from the government, since they need our products.

And then on the real estate site, we've been pushing and pushing. And California is quite frustrating, to get entitlement. Once we have entitlement, the real estate market in Sacramento is going to drive what we can do in terms of monetization of that property.

Congratulations and continued success on the remainder of the year.

Joe Nadol, JPMorgan.

A few questions for you. Starting out on the margins side in Aerojet, just wondering, in Q4 we saw, I think ex the items 9.4%. I don't know how much Titan was in there at the higher margin but wondering I guess how much was in there and if that is a good run rate for next year?

I think as we've commented before, our goal at Aerojet is to get to double digit margins. We didn't have very much Titan in the fourth quarter. And that is certainly our goal as we go forward and we're going to try and focus on that and make sure we achieve that.

Were there are any other unusual, even marginal unusual items in Q4 or contract adjustments, that sort of thing?

No, other than what we have talked about in the release.

Okay. And then secondly, just looking at the top line opportunities, what did you think of the NASA budget situation, how is that impacting your funding? And specifically, now that you have definitized the Orion contract with Lockheed, can you tell us what sales were in 2007 and what you expect sales to be in 2008 for that program?

What we're expecting sales to be is in the $50 million a year range, given the current contract that we have. We have some hope that we may see additional scope going forward in the contract for Orion.

What we are seeing right now in terms of NASA is what we see for most of our customers, which is they want more things done than they have appropriations to do. However, I can say from what we are seeing from NASA that Orion, the program itself seems to have the top priority of the people at NASA. And so I think if NASA has funding issues, hopefully, we will be the last to feel it in terms of the Orion program.

Okay. As you think you may be able to generate a little bit of -- or a resumption of growth in '09. I think what you are telling us in '08 is a little better than what you'd said before, you were looking for perhaps some modestly declining revenues before.

I think when I say flat, what I mean by that is probably a range of, it could be down 3% or it could be up [2%], that kind of range.

Okay. But what is driving growth in your telescope as you look beyond '08 and '09 and hope for a resumption of growth from what you see here? Is that Orion in NASA or is it more the defense side of things?

It is both. We actually see some more programs getting a little more robust in 2009. We also -- particularly missile defense. And we also see or expect that we may see some additional business on the [Aries], the launch vehicle for Orion, starting in '09. Will it be large? No. But will it be an increase? Yes.

Okay. Good job on cash this past year, a huge improvement there. I am wondering looking forward, you mentioned that several times as a priority which is great, is there anything as you look at -- I mean your sales are going to be roughly flat -- is there any reason that working capital should be a use of cash? You have a little bit of a boost coming from your pension expense which is non-cash, and so you mentioned $7 million there. [Your offense] to that, bring us back down to free cash flow in line with net income or is it going to below and why?

I think you're absolutely right there. We shouldn't see anything happening with working capital given sales expectations for the year. The only drain on Aerojet's cash flow continues to be and will be is environmental, to the extent we don't recover the 12% on our environmental expenditures and to the extent we have to hang up environmental expenditures associated with the receivable that we have from Northrop Grumman. That will continue to be a drain on Aerojet still.

And on what sort of scale are you looking at in '08 for that? I guess what was the drain in '07? What do you think is your early prediction as to what might be in '08?

Yes, depending on what we spend, if we spend at levels consistent with '07, where we are spending like $50 million, $60 million on environmental expenditures, you are roughly going to say that the net drain on cash flow from that is going to be somewhere in between the $10 million to $15 million range.

Okay. So if that happens, then you would be -- you would expect -- everything else being equal, free cash flow to be maybe 5 or a 10 below net income because you have a little bit of a boost from pension. Is that fair?

Yes.

Okay. And then just finally over to real estate. I guess if we could take a step back and talk about Rio Del Oro just a little bit. Obviously, there has been a number of bumps in the process, not unexpectedly. But where are we precisely today and when, in your sort of best projections -- what quarter this year, what month do we see some milestones there?

Here is where we are on Rio Del Oro. As you know, the city of Rancho Cordova, which is the entitlement of approving authority lost a number of cases on entitlement. Based on those cases, they decided to republish a couple sections of our EIR, EIS for Rio Del Oro. They are currently in the process of reviewing their redraft and tell us they are going to issue the segment sometime in the next month and a half. So if they are on schedule, we're looking at seeing something out before the end of March.

Once that occurs, then it is a matter of them setting the public hearings. In kind of best case, would probably be midsummer for approval. And then you still have the period of which somebody could file suit. It is kind of an interesting environment for real estate in Sacramento right now. One of the things that affects our economics has been the fees that the entitlement authorities charge the builders for building permits when they actually go to put up a structure.

Because the environment in Sacramento was so hot, those fees went up and up and up to where for a R5, of which is five units per acre kind of home they [would build], Rio Del Oro has suggested they would charge in the past as much as $100,000, $105,000 for a building permit.

Right now with almost no building taking place in Sacramento, the environment or the swing is going probably in our favor where we can negotiate much lower fees. And that is our objective. And so that is going to be one of the things that we are going to be focused on as we go through the rest of the entitlement on Rio Del Oro -- is how -- what is a reasonable fee as opposed to the counties and cities in California using these fees as a large revenue base.

Is there a lobbying coalition among some of the local homebuilders to try to make that happen? And is that going to happen this year, do you think? Or is there any timeframe at all?

Every city or county sets their own fees. And there's a California law which basically says it has to have a nexus to the actually improvements. I think just the economic situation is driving hopefully the cities and the counties to adjust down with the fees. Whether we will see them in the $40,000 range like they were prior to the runoff is our hope. But again, it's almost -- it's a negotiation with each entitlement authority that you go through. If, for example, the city of Rancho Cordova wants to see buildings go up and homes go up, that's not going to happen if they don't have a reasonable fee.

Okay. And then just I guess overall on the real estate effort, can you talk about who is running the show right now for your Company? I guess your staff (inaudible) Terry, what's the team like? What's the budget look like since who knows when this market is going to get any better? Obviously, the data hasn't shown us any hope yet but eventually it will. But what kind of costs are you carrying there and how has that team evolved recently? Because I think there's been some changes.

Yes. I mean, what we've done with the team is we've added about I think three people. One we announced was a guy named Mike Pavik, who basically is the engineering here's what it's going to cost to put in infrastructure. And currently they are working on here's the plans and how do we cost reduce -- or anybody cost reduce any kind of units that go in.

Then we added a couple of financial people, again, to keep track of expenses and to make sure that we beef up the accounting for that business and the systems for that business. But we haven't added any large group. And we're really waiting -- in terms of who is running it right now, I am.

We are currently out in the market for a president of the real estate group but we haven't hired anybody yet. So, it's -- it reports directly to me. And it's the same people who have been working with the city and the county on Glenborough and the city on Rio Del Oro.

And so we've got good continuity and we expect to continue the entitlement effort. Once we finish those two projects, we're also working on Westborough and what we used to call the Folsom sphere of influence but now known as Hillsborough. But we have more entitlement to do after these two projects.

Right. And then just finally, Yasmin, on the balance sheet with the cash picking up, is there any particular issuances of debt or maturities coming up or what do you plan to do with the cash coming in this year?

One of the options -- we don't have any maturities coming up -- we were very, very fortunate that we ceded our senior credit facility earlier on in the year where we extended the maturities and have the revolver, have lots of letters of credit capacity. We closed the balance of cash of $92 million. At this point, we like having a strong liquidity position. We like having cash and we like having the options available to us. So we will just evaluate that as the year goes along.

Okay. Is there any -- do your covenants allow you to think about buying stock at all?

No, they don't allow for buyback of stock.

Okay, so most likely that cash balance will build and maybe you'd decide to do something with some of your debt? Is that --?

Exactly.

Jim Foung, Gabelli & Co.

Hi, Terry, Yasmin, good quarter, guys. I guess to start with on the Aerojet side, in your discussion you said 2008 Aerojet sales would most likely be flat over '07. But then you said the Orion would bring in about $50 million of revenues and Titan was $30 million. So I mean so it seems like just on that change in program, that revenues could be up on Aerojet in '08. So I guess why the negativism here?

We had some Orion revenues in '07. So it's not an incremental $50 million. It is a smaller number than that.

Oh, okay. What is the incremental in '08 then?

It is probably going to be a little bit above what we saw in '07. Orion has been running about $50 million to $60 million range.

In '07, right? Oh, an annualized basis running $50 million to $60 million? Okay.

Yes.

And then how about the Atlas Motors? Are you seeing any revenues -- any pickup there in '08?

It's a program that runs about $50 million a year for us too. We are probably -- we had about seven motors in '07 that were delivered. We are probably going to be looking at the same number of motors right now for Atlas, two, six, seven motors.

Okay. So on your revenue side, it would probably be the same then, right, in '08? But the margins should be better in '08 from the Atlas business because you renegotiate the contracts, is that --?

Yes. Yes, it should.

And then if I look at the margins in the fourth quarter, stripping out the -- I guess it's the orders charges, 9.4%, is that good baselines? Because it didn't have any Titan revenues in the last quarter?

You're pretty shrewd on that one.

Okay. And then just lastly on the pension expense, Yasmin, did you say that you're looking for pension expense to be $7 million in '08 versus about $21 million in '07?

Yes.

And then what would be your tax rate in '08? Would you be a taxpayer or would you -- in terms of on the P&L?

We are probably going to pay a little bit of A&P, some state taxes in A&P. We've still got $220 million of net operating losses. So we're not going to be a taxpayer in '08 other than A&P, which can run a couple of million dollars a year.

Okay. So just the swing in the pension expense in '08 from '07, you could bring down like $0.25 in earnings per share. I mean, is that a fair way of looking at it?

Yes. The pension expense for '08 is definitely a good trend that compared to '07. The interest in question there is what is this [comp rate] do this year. And our measurement date is August 31 and what's that going to do to us as we go forward.

Okay. So your discount rates, you set the discount rate August 31?

Yes.

So for 2008, then, right?

Yes. It's set right now, last August 31 we set the discount rate for 2008. So we know that 2008 is $7 million.

Okay. So then that'd be set for 2009 this coming August?

Correct.

Right. Okay. All right, great. Thanks a lot then.

Andrew Sidoti, [Markson International].

Good morning, Terry and Yasmin. Just in regard to top line opportunities, can you give us an update on the design work that you are doing for Orbital scientists towards two launch vehicles that I -- my understanding it would use the AJ26 engines. How close is Orbital to making a go/no go decision on that particular program? And if it's a go decision, what kind of revenues and margins could we be looking at here? And what the timeline would be like?

What I understand -- and again, it's an Orbital program, so Orbital would be the definitive people to ask about it -- is they're currently still going through their planning process on this for their launch vehicle. And right now they are trying to engineer costs out of it to meet a business plan that would allow them to go ahead and invest in the program. We are trying to encourage them, obviously, as much as we can. We have the AJ26 engines which were originally Russian engines that have no accounting basis because we wrote them off a number of years ago as a result of the [Kisler] failure.

And I think their plan calls for the use of probably six engines a year, eight engines a year. And we haven't yet arrived at what we would charge them for those engines. But the numbers are in the -- could be substantial if they have enough launches.

Okay. And how many of those engines did you say you have?

I think we have 43, is that right, Yasmin?

Yes, we've got 40-plus.

Okay. And then last thing I want to touch on was your operating -- your net operating losses, I know you have both capital and operating. And I know some of them are expiring. And I was just wondering if you could talk about your plans to use them?

Well, I think the best way to use our operating losses is going to be to generate lots of operating income. They don't expire until beginning -- start expiring in another 10, 12 years. So we certainly hope to use those. Our capital loss expires at the end of 2009. So we continue to monitor opportunities to use that. And it's on our radar screen.

Okay, but no definitive plans on exactly how you would go about monetizing that capital loss?

We have a couple ideas but have we done anything yet to trigger those? No.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Please continue.

All right, thank you, operator. I want to make one statement that I was negligent in not making earlier. Yasmin earlier said that we were lucky that we fortunately refinanced our credit line in June. It wasn't just luck; it was basically Yasmin pushed and pulled the Company to do it. And so she should get a great amount of credit for achieving that for the Company and making sure that the turbulence in the credit markets are having no impact on GenCorp going forward. So I wanted to publicly state that and thank her for what she did for the Company.

Having said all that, we're looking forward to 2008. And as I said, we're quite optimistic about the future of this Company, given how far we've come from the early 2000's when at times it was questionable whether the Company was going to survive to right now, I can say it's been quite a success and quite a successful year. And we expect that trend to continue.

We will talk to you again in a few months when we talk about Q1. So until then, we'll say good bye and talk to you again soon.

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