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Executives

Linda Cutler - Vice President, Corporate Communications

J. Scott Neish - Interim President, Interim Chief Executive Officer

Yasmin Seyal - Senior Vice President and Chief Financial Officer

Analysts

Joseph B. Nadol III - JP Morgan

Vin Lawrence - Suttenberg Capital

GenCorp (GY) Q2 2008 Earnings Call June 30, 2008 5:00 PM ET

Operator

Good afternoon, my name is Nicole and I would like to welcome everyone to the GenCorp 2008 Second Quarter Earnings Conference Call (Operator Instructions). At this time I would now like to turn the conference over to Miss Linda Cutler. Please go ahead.

Linda Cutler

Good afternoon everyone and welcome to GenCorp’s second 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 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 earnings release just issued today, as well as managements 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.

Scott Neish

Good afternoon everyone. Also joining me today to discuss GenCorp’s second quarter results is our Chief Financial Officer, Yasmin Seyal.

Let me start out by first commenting on the recent board changes during the quarter. As most of you are aware, Tim Wicks, Dr. Sheila Widnall and Todd Snyder resigned from the board in May. I would like to thank them for their years of service and contributions to the Company as members of the Board of Directors and wish each of them well in their future endeavors.

Jim Henderson, who joined the board in March, was elected to replace Tim Wicks as the non- executive Chairman of the Board and Jim Perry, who brings both finance and aerospace and defense expertise, was appointed to the board in May. The new board and management are working closely together to evaluate how to best enhance shareholder value and have begun the process of looking at various options and scenarios, which at this point we cannot comment further upon, but we do expect to be in a position to do so in the late summer timeframe.

Next let me say that the company is pleased with its overall operating performance for the quarter. In my prepared remarks this morning I will briefly address how Aerojet is doing and some successes it has had in the last three months since we last talked. I will also give you an update of where we are with regards to our real estate projects; but first I would like to turn the call over to Yasmin to review with you our financial results.

Yasmin Seyal

Thanks Scott and good afternoon to everyone. My comments this afternoon will focus on the financial results of our two continuing operations, Aerojet, and real estate. I will comment on the company’s second quarter sales, income, cash flow, and net debts results and also discuss the 401k shares matter and rescission offer which we talked about in the release that we just issued a little while ago.

Today the company reported net income of $6.9 million or $0.12 diluted earnings per share for the second quarter 2008, compared to net income of $12.5 million or $0.21 diluted earnings per share in the second quarter of 2007. As you may have noticed in the release, the second quarter of 2008 does include a $12.7 million charge associated with the restated shareholder agreement the company entered into with Steel Partners in March of this year. I will touch upon that charge in my comments later on.

Commenting on sales first, which for the second quarter of 2008 were $195 million, compared to $192 million in 2007. Sales for the first half of 2008 were $371 million in 2008, compared to $343 million in 2007.

With regards to Aerojet, second quarter sales were down $8 million; however year-to-date sales are up $18 million. We saw growth on Standard Missile, Tube and the Orion programs, which was partially offset by a decrease in the Titan program, which as many of you know, we completed the close out activities for in 2007.

Also as I have noted in my prior two calls, our goal from a sales perspective for Aerojet is to replace the Titan business, which accounted for approximately $30 million of sales in 2007 and it is our objective to replace those sales to the Missile Defense Program and the continued development of our Orion related efforts. We remain focused on achieving this goal and Scott, in his comments, will comment upon some of the successes that Aerojet has experienced that points to this.

With respect to our real estate segment both the second quarter and year-to-date totals include proceeds from the sale of the 400 acres of the Rio Del Oro property to Elliott Homes for $10 million in cash.

Commenting next on segment performance which is a non-GAAP financial measure and is defined in the operating segment information table included in the release that we issued a little while ago:

Aerojet, its segment performance for the second quarter, excluding environmental remediation provision adjustments, retirement benefit plan expense and unusual items, was $23.5 million, representing a 12.8% return on its sales. This compares to $29.4 million and a 15.4% return on sales for the same period in 2007.

As many of you know and as we noted in our release today, margins in 2007 were helped very favorably by our Titan close-out activities; however we are fairly pleased with the 2008 performance as well for Aerojet. We did see good performance on the Atlas contract in this quarter; however as in the first quarter, we did see some negative performance or some performance on programs that we experienced in the second quarter, but again, we believe that that performance is behind us and was offset by the good performance on the Atlas contract.

On the year-to-date basis, looking at the same measurements for Aerojet, Aerojet’s segment performance in the first half of 2008 was $38.4 million representing a 10.7% return on sales, compared to $43.7 million and a 12.9% in the first half of 2007. Again 2007 margins were helped by the Titan close-out activities.

2008 margins on an overall basis for the first half of the year are holding up to our expectations.

Turning next to the real estate segment and segment performance for the real estate group, segment performance was $7.1 million for the second quarter, compared to $0.6 million in 2007. Both periods reflect our normal ongoing lease activities, but 2008 does include the 1 x $6.8 million gain on the 400-acre land sale.

Next I would like to comment on some of the other components of continuing operations. Our combined interest expense and interest income was relatively unchanged at $5.9 million in the second quarter of 2008, compared to $5.7 million in 2007. Second quarter 2008 corporate and other expenses were $1.7 million compared to $5.3 million in 2007. This decrease is primarily caused by the reversal of previously recognized stock based compensation expense due to the lower fair value of the stock appreciation rights as of the end of the second quarter and also lower management incentive expenses.

2008 retirement benefit plan expense, which is mostly non-cash, is $2 million for the second quarter, compared to $5.3 million in 2007. As I have noted on previous calls, the decrease reflects the impact of higher discount rate assumptions and favorable market performance in our pension assets.

We still project the 2000 and full year expense to be in the $7 million range with no cash contributions required to our major plans in 2008.

Now turning to our debt position: Net debt which is total debt less cash, as of May 31, 2008 was $382 million, a $28 million increase from $354 million as of November 30, 2007. The increase reflects the $35 million funding of the grantor trust. Net cash usage over the first half of the year related to corporate interest, retiree medical and legacy matters, partially offset by the proceeds from the sale of the 400-acres to Elliot Homes and notably cash generation by Aerojet.

Our liquidity position at quarter end remains good, with cash balances of $59 million and an un-drawn revolver of $80 million.

I mentioned earlier that I would comment on the $12.7 million unusual charge and I am also going to comment on the $35 million of the funding of the grantor trust.

As we talked about at the March call, we entered into an amended and restated agreement with Fields Partners on March 5, 2008 with respect to the election of directors for the 2008 annual meeting and certain other matters. As a result of this agreement, in accordance with the terms of the company’s benefits restoration plan and existing executive severance agreements, at that time when we talked about the shareholder agreement we were estimating that the company would incur a charge in the range of $11 to $15 million in the second quarter.

The charge that has been recorded is in fact $12.7 million and this charge does include severance costs for Terry Hall, our former CEO and President; increases in the pension benefits primarily for the company’s officers; and accelerated vesting of the outstanding stock based performance awards.

Also as a result of this agreement the company did fund the $35 million into the grantor trust on March 12 an this funding covers the liability associated with the benefits restoration plan, which covers a retired employees and current employees and represented some liabilities that were on our balance sheet; then also potential liabilities associated with executive severance agreements.

My final comments today are on the 401k shares registration and intended rescission offer discussed in the release that we issued a little while ago.

The company inadvertently failed to register with the Securities and Exchange Commission the issuance of certain shares in its defined contribution 401k employee benefit plan. As a result, participants who purchased these shares pursuant to this plan in velocity may have the right to rescind certain of their purchases for an amount equal to the purchase price paid for the securities. RSB’s shares were in fact sold to receive damages with respect to any loss incurred, plus interest from the date of the purchase. The company intends to make a registered rescission offer to eligible plan participants later on in this quarter. We have also begun the process to seek approval required on our senior credit facility to facilitate such purchase of the shares and the rescission offer.

We recorded a charge of $900,000, which is reflected in unusual items in connection with this matter in the second quarter of 2008 and currently estimate a cash usage in the range of $6 to $12 million for the purchase of these shares upon the completion of the rescission offer.

That concludes my comments for the second quarter earnings release. With that, I would like to turn the call back to Scott.

Scott Neish

Looking at our Aerojet segment, as Yasmin noted sales and margin performance for the quarter were good, especially given the changes that we’re experiencing this year on our overall book of business given the close-out of the Titan program.

The second quarter was marked by a number of positives, including most notably the exciting success of the Phoenix Mars Lander. This mission was enable by a flawless performance of Aerojet engines in every phase of the flight from launch, to cruise, to guided descent and touchdown on the northern polar region of the planet. We are very proud of our role in this success.

At the same time our propulsion systems achieved 100% mission success for Shuttle Endeavor and Discovery Flights in March and May respectively.

Looking at our ongoing Atlas business, as Yasmin told you we had another strong quarter, during which we met all the key program milestones. The highlight this quarter was the successful launch of the ICOG1 spacecraft, the heaviest payload ever launched by an Atlas launch vehicle.

We also finalized the 2008/2009 contract option for Solid Rocket Booster Propulsion. The favorable performance on the Atlas program shows that our intensive efforts over the last 2 ½ years have put the initial development and production issues behind us. Atlas should now deliver long-term stability and financial benefits for us as we go forward.

Our work on NASA’s Orion crew and service modules also scored significant development milestones. The program passed a large number of engine tests successfully, which in succession have retired many performance risks associated with NASA’s space shuttle replacement system.

We entered into a new contract with Bigelow Aerospace to provide propulsion for their new Sundancer manned spacecraft, which gives us our first visible presence in the emerging entrepreneurial space market. We expect this effort to lead to more opportunities as space exploration opens to the for-profit market.

On the defense side of our business, strengthening revenues in the Patriot, Tube and NORS programs paint a similar positive picture and our ongoing solid rocket motor development and production contract performance continue to give us additional opportunities, particularly through a number of key follow on awards including Tomahawk program, PAC-3, and the guided MRLS program. These programs are less visible and rarely cause the enthusiasm of the space program among the general public, but as you know, they are a key part of our business and are critical to our nation’s defense and its ongoing transformational objectives.

I want to close my Aerojet remarks by pointing out our outstanding employee safety record at Aerojet, which has brought us recognition, a good working environment and has become a key driver on our efforts to deliver 100% mission success to our customers.

Our Camden, Arkansas facility reached two million man-hours without a lost time accident, an achievement few companies can claim. For that milestone they earned the prestigious National Safety Councils National Safety Achievement Award. We are also proud that our Redmond, Washington facility has just passed one million man-hours without a lost time or in fact even a recordable accident at that facility and our Gainesville facility also very recently just reached one million man-hours without a lost time incident.

Turning to the real estate front, we continue to make meaningful advances in major projects. Looking first at our Glenborough at Easton and Easton Place project, Sacramento County has released the public review draft of the environmental impact report and the Planning Commission hearings have begun, providing a forum for public comment.

The first county planning commission hearing was conducted on June 10 and a second on June 24; a final meeting is expected on July 8.

The first two hearings went well with support voiced by the commissioners and no public opposition testimony. The planning commission closed the public comment on the EIR formally on June 24 and could possibly act on a recommendation for approval to the board and supervisors at the July 8 hearing. We still anticipate receiving final entitlement from the county toward the end of the year.

On our Rio Del Oro project, the city of Rancho Cordova and the US Army Corps of Engineers have released for recirculation and public review, the revised sections on biological impacts and water of the EIR/EIS. Public comment period closes July 7.

We announced on April 25 that Sacramento County terminated our remediated water agreement, which both parties had the right to do if an appropriate water supply delivery project had not been approved by a certain date, in which the county did in fact exercise.

With respect to Rio Del Oro, the revised environmental impact report took into account that this water agreement with Sacramento County may be modified or replaced with a new agreement. We continue to negotiate with the county and other water providers on replacement agreements which we anticipate could be in place later this year. Renegotiation of this water agreement does not affect the Glenborough at Easton or Easton Place projects where we have a separate water supply agreement with the city of Folsom.

We continue to work on entitlement of the Westborough project. Given the time requirements of the lengthy process, we do not anticipate entitlement for another 18 to 24 months.

Thank you for listening. Now Yasmin and I would like to answer any questions you have.

………..

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joe Nadol with JP Morgan

Joseph Nadol - JP Morgan

I have a couple of questions: to start out with, just on the Aerojet performance, could you quantify the Atlas scheme adjustment and then the offsets from Redmond is my understanding?

Yasmin Seyal

Joe if I look at those, I think they are both kind of net out, big picture, to performance improvements and the issues that we had on a couple of the contracts. As you may recall we had some issues in the first quarter too. There I have said, look they are less than the fingers on one hand and pretty much the same is true of the second quarter too. They have been on different contracts and the Aerojet team has certainly worked very, very hard to put those behind us, but certainly we expect those issues to be behind us at this point in time.

Aerojet performance and the Atlas program, as Scott has said too, has been good and we are looking forward to more better performance too.

Scott Neish

The Redmond’s operations performance slightly exceeded our expectations for the second quarter, so we feel like they are getting that operation back on track.

Joseph Nadol - JP Morgan

On the Atlas contract, can you just remind us where we are, because we went to general margin on that before and is this sort of the reversal of some of that previous reserve and is there more opportunity on the upside?

Yasmin Seyal

The Atlas contract, this new Atlas contract that we have is the negotiated 2007 and 2008 performance and we took a charge, as you remember, on the call back and then we terminated or finished off the old contract and then negotiated this new buy. This new buy was negotiated at margins that we definitely like. It is in effect private contract and the performance on that has been good.

We currently have definitized the next buy of the Atlas contract too, which will take us into 2009 and into 2010. These are more for production buys than the Atlas contract now.

Joseph Nadol - JP Morgan

On the 401k issue, I have a couple of follow up questions. How far back does the situation go in terms of when the shares were purchased? Does this go back years and years or is it just the last couple of years?

Yasmin Seyal

This issue goes back, the actual issue goes back a number of years, back where the actual purchase of the shares that has to be done spends back one year, so the rescission offer that the company intends to make will go back one year.

Joseph Nadol - JP Morgan

One year, okay and what exactly is going to be the impact to earnings? You have taken, you know…

Yasmin Seyal

At this point we have recorded a charge, as I have mentioned, of $900,000 which is our best estimate of the impact on earnings at this point due to the rescission offer. The cash flow impact that comes will be a cash flow impact that I talked about in the range of $6 to $12 million. The bulk of that cash flow impact will go through the treasury stock in the equity section of the balance sheet and not go through the P&L.

Operator

Your last question comes from Vin [ph] Lawrence with Suttenberg Capital.

Vin [ph] Lawrence - Suttenberg Capital

Yasmin, could you tell me what is included in the SG&A line, why is it a negative number this quarter?

Yasmin Seyal

If you look at the SG&A line number, a lot of that, if you look in the P&L there, it’s essentially the corporate overhead, corporate costs that you see in the segment performance line that goes through the P&L.

Vin [ph] Lawrence - Suttenberg Capital

Are there any unusual things included there?

Yasmin Seyal

No, I think that the one that I have commented on there is the reversal of the stock compensation expense. That is the unusual item that is going through, if you would like to call it an unusual item, but that is the side that it’s coming through there.

Vin [ph] Lawrence - Suttenberg Capital

Also, Scott could you elaborate a little bit more on the strategic alternative side?

Scott Neish

No, I really can’t at this time, because we haven’t completed that analysis. It won’t be until some time later in the year, probably late summer before we will be able to make any comments on that.

Operator:

It appears we have no further questions. Please continue with any further remarks.

Scott Neish

I have no further closing remarks. Thank you all for attending today, we appreciate your attendance.

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