Aerojet Rocketdyne Holdings Inc (AJRD) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the GenCorp 2008 first-quarter earnings conference call. At the request of Ms. Linda Cutler, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

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

Thank you, Amy, and good morning, everyone, and welcome to GenCorp's first-quarter 2008 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 Securities Litigation Reform Act of 1995. All statements in this conference call and 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 earnings release 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.

Now I would like to turn the call over to Scott Neish.

Thank you, Linda. Good morning. It is my pleasure to join you this morning to share our results for the first quarter of this year. Here with me this morning is Yasmin Seyal, our Chief Financial Officer. As most of you know, Terry Hall resigned as GenCorp's CEO in early March and I have been asked by the Board to assume the position of interim CEO while a search is undertaken for Terry's replacement.

I would like to take this opportunity to thank Terry for his many contributions to the business, and we wish him well in his future endeavors. And I want you to know that we are continuing our efforts to maintain and accelerate the progress that our Company has made in the last several years to increase the value to our shareholders.

To that end, I am pleased to report that the first quarter was marked by a number of successes. Aerojet's revenues remain strong and real estate completed a key milestone toward realizing the value of the Rio Del Oro portion of our real estate plan.

At Aerojet, we were able to replace sharply declining sales from the Titan program, now nearing completion, [with] revenue increases on the NASA Orion program, as our scope on that program increases and the program ramps up into full-scale development.

Additionally, strong performance on the Atlas V contract helped to partially offset the absence of Titan profits that we enjoyed in the first quarter of 2007.

On the defense side of our business, we benefited from higher sales volume on a number of programs, including TOW and Standard Missile, and new work in production contracts in our Specialty Metals Products Division in Tennessee.

The Real Estate segment received notification from the California Department of Toxic Substance Control that they had released from environmental order 2300 acres designated as Rio Del Oro, clearing an important hurdle toward monetizing a significant portion of the land in the planned Easton development.

Now I'm going to turn this over to Yasmin Seyal to share with you our financial highlights for the quarter.

Good morning to everyone. My comments this morning will focus on the financial results of our continuing operations, Aerojet and Real Estate. I will comment on the Company's first-quarter sales, income, cash flow and net debt results, and also on the financial implications associated with the recent restated shareholder agreement the Company entered into with Steel Partners.

Today, the Company reported income from continuing operations of $3.3 million, or $0.06 per share, for the first quarter compared to a loss from continuing operations of $2.1 million, or $0.04 per share, in the first quarter of 2007. The improvement reflects decreased retirement benefit plan expenses and lower costs associated with our environmental cleanup and related activities, partially offset by the favorable performance recognized last year on the Titan close-out effort.

Let me comment first on sales, which for the first quarter of 2008 were $177 million compared to $150 million in 2007, reflecting a year-over-year increase. But the first quarter of 2008 does include an extra week as compared to 2007, as we noted in the release that we issued this morning. However, we did have some growth, most notably on Standard Missile, TOW and our Orion program, as Scott commented on a few minutes ago. This was offset by a decrease in the Titan program as we completed the closeout activities on this program last year.

As I noted on the January call, our goal in 2008 is to replace the Titan business, which in 2007 accounted for approximately $30 million of sales, and we intend to replace this business with the missile defense programs and the continued development of our Orion-related efforts.

From a sales standpoint, we are encouraged, with a good start to the year.

Commenting next on segment performance, which is a non-GAAP financial measure, and is defined in the operating segment information table included in our release that we issued this morning. Segment performance for the first quarter was $11.7 million, up $3.7 million from the first quarter of 2007. Aerojet's segment performance for the first quarter, excluding environmental remediation provision adjustments and retirement benefit plan expense, was $14.9 million, representing an 8.5% return on its sales. This compares to $14.3 million and a 9.6% return on sales for the same period in 2007.

Needless to say, we are somewhat disappointed by this percentage decline. However, we were certainly pleased with the recognition of favorable performance on the Atlas contract, but it was offset by certain issues that we encountered on some other programs, which we are working very hard to mitigate as we go through the rest of the year. And we still hope -- our goal is to achieve double-digit margins in 2008.

As we noted in our earnings release, margins in 2007 were helped by our Titan closeout contract, which completed last year.

Looking next at our Real Estate segment, sales for the first quarter of 2008 were $2.1 million compared to $1.7 million in 2007. Both periods reflect our normal ongoing lease activities. But 2008 also included some additional one-time revenue and income associated with the final negotiated adjustments to the property usage agreement with the Sacramento Regional Transit that was initially recognized back in 2004. Segment performance for Real Estate was $1.3 million compared to $0.8 million in 2007.

Commenting briefly on the other components of continuing operations income, our combined interest expense and interest income was unchanged at $5.9 million in both the first quarters of 2008 and 2007. First-quarter [2000] (sic -- see press release) corporate and other expenses were also comparable to 2007 period.

2008 retirement benefit plan expense, which I have noted on a number of calls is mostly non-cash, is $1.9 million for the quarter compared to $5.3 million in 2007. As I noted in the year-end call, the decrease reflects the impact of higher discount rate assumptions and favorable market performance. We still project the 2008 full-year expense to be in the $7 million range, with no cash contributions required to our major pension plans in 2008.

Now turning my comments to debt and cash flow, net debt, which is total debt less cash, as of February 29, 2008 was $373 million, a $19 million increase from $354 million as of November 30, 2007. The increase reflects cash usage by Aerojet in the quarter, as well as costs related to corporate interest, retiree medical and Legacy matters. Aerojet has historically been a user of cash in the first quarter, as many of you know, and a cash generator over the remainder of the year, and we certainly expect this trend to continue in 2008.

Some key cash metrics for the first quarter. Net cash used by operating activities was $14.9 million; depreciation and amortization was $6.5 million; and cap expenditures were $4 million for the quarter.

Our liquidity position at quarter end was strong, with cash balance off $72.5 million and an undrawn revolver of $80 million. However, this position was weakened somewhat as a result of the recently negotiated agreement with Steel Partners, which I will briefly comment on next.

We entered into an amended and restated agreement with Steel Partners on March 5 with respect to the election of Directors for the 2008 annual meeting and certain other matters. As a result of this agreement and in accordance with the Company's benefit restoration plans and existing executive severance agreement, the Company expects to incur a charge in the range of approximately $11 million to $15 million in the second quarter. The charge includes severance costs for Terry Hall, increases in the pension benefits for certain of the Company's officers and accelerated vesting of outstanding stock-based performance awards.

The Company also funded approximately $35 million into a grantor trust from our cash balances on hand on March 12 to cover liabilities associated with the benefits plan and the executive severance agreement. Needless to say, the funding of the trust did reduce the Company's available liquidity.

As I finish my comments here, I would like to thank our four directors who did not stand for reelection for their contributions, Mr. Bolton, Mr. Didion and Mr. Osterhoff. From a finance perspective, Mr. Osterhoff for his tremendous and invaluable leadership of the audit committee over the years. I would also like to thank Terry for his leadership and dedication in strengthening the Company to what it is today.

Finally, I would like to say and reiterate that the GenCorp management team has and still remains fully committed and dedicated to growing the business, unlocking the full value of the Company's access real estate assets and doing our level best to enhance shareholder value.

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

Thank you, Yasmin. Just a few comments about both the Aerojet and the Real Estate segment. The growth Aerojet has seen, both organic and inorganic, over the last five years indicates that our technology investments have been sound and our merger and acquisition decisions have paid off. We have worked through an intensive period of industry consolidation and top-line budget growth over the last several years to improve our overall competitive position.

The result is that we now believe we're well-positioned in our primary markets, have successfully aligned our portfolio with current and emerging government priorities, particularly space exploration, missile defense and tactical missiles. We will continue to weigh those priorities and make adjustments to assure that we can anticipate and fulfill our customers' needs. We will also continue to pursue opportunities to strengthen the business, including ways to reduce operating costs and grow our revenue base.

Particularly pleased with the excellent progress we have made over the last few years in adding strength to our customers' value proposition. Received affirmation of this last quarter when Boeing announced that for the second time in three years, Aerojet has been selected as their supplier of the year in the propulsion category. Aerojet was selected after an extensive review process where Boeing evaluated thousands of suppliers in more than 66 countries around the world.

The winning supplier was selected based on overall performance and product quality, on-time delivery, post-delivery product support and cost during a 12-month period ending in September. Among the Aerojet programs evaluated were the F-22, HyFly, GPS and the Delta II program. Speaking of Delta, since we spoke to you last time, Aerojet's Stage 2 propulsion supported the successful launch of an Italian commercial satellite and another global positioning satellite, marking our 261st and 262nd consecutive successful Delta launches.

We also received good news in the quarter from NASA, when we learned that our customer Orbital Sciences and their new Taurus II launch vehicle were selected for COTS, the commercial orbital transportation system. COTS will fly an unmanned payload to International Space Station for resupply, and each Taurus II launch vehicle will be powered by two of our Aerojet AJ26 first-stage booster engines.

In the Real Estate area, the significant development there is the release by the California Department of Toxic Substance Control from environmental order of the 2300 acres of Rio Del Oro. We will continue to strengthen our position by seeking additional entitlements in the real estate area and position ourselves for recovery in that market.

So we are pleased with the progress that was made in the first quarter and we look forward to working with our new Board as we continue to focus on the performance and growth of the business.

With that, I will open it up for questions.

(OPERATOR INSTRUCTIONS). Joe Nadol, JPMorgan.

Thanks, good morning. A few questions. At the start-out on the margins in Aerojet, I understand there was a favorable performance on Atlas offset by some other declines. I guess I would like, if possible, some more detail on what other programs saw margin degradation and what was the -- if you could quantify the plus from Atlas and the minus from the other programs collectively, that would be helpful.

Joe, we experienced some issues on some of our armament programs. And I would say they were probably more of a technical nature combined with some operational issues that the team has been working very, very hard to fix, and I would like to think that most of those issues are now behind us. Scott and the rest of the management team is certainly focused on those issues. And I think it is fair to say that the Atlas results were offset by these issues that were incurred on the other programs, and net-net, they are probably less than my fingers on one hand.

Okay. Meaning that the -- were these profit reductions or were these forward losses taken on the armament programs?

They are a combination of both.

Okay. Secondly, on the cash outlook, you had -- it was -$19 million of free cash flow in Q1, and you have discussed the $35 million payment that you made as a result of the Steel Partners' change of control. What is the outlook, I guess more broadly, for cash flow aside from that in Q2 and the rest of the year? Do you have a grasp of sort of how working capital might play out?

I think overall on a full-year basis, excluding the $35 million, we certainly still hope to be in a breakeven cash flow position. And if all goes well then in a slight cash generation position, where essentially the cash coming in from Aerojet is covering interest expenses, legacy expenses, corporate expenses and the retiree medical costs.

So since we were -19 in Q1, do you expect that to flip over to positive and start to go positive in Q2, or is that going to be more towards the end of the year?

I think we will see the trend reversing in Q2, Q3 and Q4.

Okay. And then finally, on the Real Estate, I know Terry played a very active role in day-to-day sort of managing the entitlement process, and I am wondering in terms of people what is going on? You had a major milestone in the quarter, but who is running things day-to-day there? And I guess stepping back, what is the timeframe for settling the change in the CEO position longer-run?

Joe, I think as Terry was spending time on the Real Estate organization, certainly I was spending a fair amount of time with him on that Real Estate organization too, and I'm going to continue to do that. We have a very, very strong team in place at the Real Estate organization, and Terry spent a fair amount of time strengthening that team over the last year.

So the team is strong at Real Estate, and certainly as the Board meets today, I am sure that it is going to be an item of discussion as to say what are the resources needed in the short-term and in the long-term, if needed, and they will take the appropriate action that needs to be taken to resolve that.

And I think from a CEO perspective, I know from my discussions with the Board that that is a high item on their priority, and they will certainly be very, very focused on that. You know, there is going to be a national firm retained to do the search and it is going to be done quickly and efficiently and very proactively.

Okay. All right. Thank you very much.

(OPERATOR INSTRUCTIONS). [Pascal Fleuriste], Trident Capital.

Hi. Could you give us some color of why your DSOs have been stretching up a little bit this quarter from, I believe, 44 days a year ago and a quarter ago and to about -- roughly about 55 days this quarter? Is there anything in particular -- you know, anything that could explain that?

No, there isn't anything, other than the cash usage that we have talked about. There isn't anything in particular.

Okay. Thank you.

Robert Smith.

Mr. Smith has disconnected. Jim Foung, Gabelli & Company.

Hi, good morning. I guess you have some capital loss carry-forward that expires in 2009. Could you talk about what you might -- how you might utilize this, and is this a priority in terms of focusing on trying to use it before it expires?

Jim, this is again going to be an item certainly for discussion with the new Board. And, you know, I can't specifically go into all of the items that we have discussed over the last year or so at this call. But it is safe to say that this is an item that will be discussed with the new Board and the Board is certainly focused on the dollar magnitude associated with that and the timeframe too.

Okay. I mean, so your intention is to try to do something with that before they expire in 2009?

There is a lot of focus on that, Jim.

Okay. And I guess just getting back to the entitlement on Real Estate, could you just give us an update in terms of Rio Del Oro? Has any of the timetable changed from the last time we had the call on this?

No, I think the timetable remains fairly steady on this Rio Del Oro. They have been working on comments in order to you know recirculate the draft EIR - EIS. And, you know, our estimate is sometime in the next couple of months that we will see a recirculation of that. The 60-day comment period opens up again, and our objective is to move forward with entitlement on Rio this year. And then also Glenborough seems to be progressing well with the county, too, with a timetable that you could see entitlement happening this year.

But as you know, it can slip from month to month, depending on what comes up or how quickly the authorities want to progress on that, but that is certainly our objective. I think the greater issue here is when is the real estate market going to recover.

Yes, this release really was in our plan and in about this timeframe and does not really change the plan.

Okay. So as far as you know, things are still on track for now.

Yes.

And then in terms of the Aerojet business, is there anything with -- I guess with the Orion or the Atlas program in the first quarter that might suggest that it would be better than what you expect for the year or lower than what you expect for --?

Yes, there is. As I alluded to earlier, we do see our scope increasing on the Orion program. We have more value that we can offer to our customer and to NASA, so we are optimistic that we will have increased scope on that program over what we had in our plan.

Okay. I think you had once kind of estimated about $50 million of business from Orion, potentially $50 million this year. So you expect that to widen a bit?

It will be at least that and we hope that it will grow.

Okay. You have kind of give us a -- I guess a sense of what you think that might grow to.

You know, that is limited by what NASA has in the way of funding, and that is not something we have a lot of control over. So it is hard for us to quantify that at this point.

Okay, thanks very much.

[Robert Smith], [Center for Performance Investment].

Hi, good morning. I lost you guys. I'm back. So I have two questions. First, could you give me an idea of what finger you have on the pulse of the position of the three candidates for the presidency in 2008, their attitude toward the missile defense shield?

I think if you are looking at it from the candidates, it is going to depend on what the views are and where we are going to see the defense budget affected by it.

Do you know their views at the present moment? I mean, have they expressed it? I mean, I'm just trying to --

We are -- obviously it is a big concern to us, and we are trying to keep a close finger on that pulse. But we don't see any negative signs there. We are actually encouraged by what we see in Congress in terms of support for missile defense, and we don't see any strong negative messages being sent by any of the candidates. So we don't think that there is going to be any significant impact.

But there has been no position papers from either of them?

No, no.

And secondly, could you give us some color on the Sacramento real estate market, I mean, as far as its place in what has been happening in the nation and California?

And as you have been reading, I'm sure, in every newspaper that there is -- the real estate market is certainly in a decline. Sacramento is no different. We saw -- compared to 2005 values, we have seen, you know, a dramatic decline in values.

Could you quantify that at all? What is an approximate decrease?

It's the decrease -- you hear numbers quoted somewhere between 30% to 40% declines in values.

And that is true in Sacramento area?

Yes.

It depends on what segment of the market you are talking about too. That number is pretty variable.

Do you know how many properties, so to speak, are being offered, statistics like that?

There is a lot of inventory in the Sacramento area. And I think the holding period for the inventory has been growing too. And I don't have the exact --.

So it is very similar to statewide numbers?

Yes.

Yes, it is. And our Real Estate folks have -- they continually analyze those numbers, but we don't have them at our fingertips.

Sure. Okay. Thanks very much.

(OPERATOR INSTRUCTIONS). There appear to be no further questions at this time.

I would like to thank everybody for joining the call here and appreciate your questions, and we look forward to talking to you at the end of our second quarter in June.

Thank you all.

Ladies and gentlemen, this conference will be available for replay after 12:00 Eastern Standard Time today, through to April 2, 2008 at 12:59. You may access the AT&T Teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 916851. International participants dial 320-365-3844.

Those numbers again are 1-800-475-6701 and 320-365-3844, access code 916851. That does conclude our teleconference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.