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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, Chief Financial Officer

Analysts

[Unidentified Analyst] – J. P. Morgan

Andrew [Sudoti] – Markstone Capital

GenCorp Inc. (GY) F3Q08 Earnings Call September 26, 2008 11:00 AM ET

Operator

Welcome to the GenCorp 2008 third quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host Linda Cutler.

Linda Cutler

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 the 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 as expressed in our forward-looking statements.

With that, now I’d like to turn the call over to Scott Neish.

J. Scott Neish

Also joining me this morning to discuss our third quarter results is our Chief Financial Officer, Yasmin Seyal.

As most of you probably know, this is a very sad time for us. Last week an employee at our Camden facility was fatally injured in a fire that resulted from the unplanned ignition of a rocket motor. We have formed a team to investigate the accident. We are also forming an independent review team of highly respected senior government and industry officials to evaluate the work of the internal investigation team. We’re very early in this process and have no conclusions to provide at this time.

I started out in our last call by indicating that the new board and management were working closely together how best to enhance shareholder value and that we had begun the process of looking at various options and scenarios. The current status is that this evaluation has not yet been completed and is still in process, and given the current market disruptions may take some time longer. Therefore the company is not yet in a position to share with you any further information.

Now I’m going to turn the call over to Yasmin to review our financial results for the quarter. Following her remarks I will then briefly address how Aerojet’s doing operationally and some key successes since we last talked with you. I’ll also give you an update with where we are with regards to our Real Estate projects.

But first Yasmin.

Yasmin Seyal

My comments this morning will focus on the financial results of our continuing operations, Aerojet and Real Estate. The company today reported a net loss of $2.7 million or $0.05 diluted loss per share for the third quarter 2008, compared to net income of $15.6 million or $0.26 diluted earnings per share in the third quarter of 2007.

The third quarter 2008 number includes approximately $7 million of charges associated with adjustments to our environmental reserves and $1 million of unusual items associated with unrecoverable portion of legal settlements. The third quarter 2007 number includes a net benefit of $1 million associated with adjustments to environmental reserves but $5 million of unusual items and it also included a $12 million income tax benefit related to certain tax settlements and statute expirations.

Commenting next on sales for the Corporation, which for the third quarter of 2008 were

$173 million compared to $199 million in 2007. Sales for the first nine months of 2008 were

$544 million compared to $542 million in 2007. With regard to Aerojet compared to 2007, sales were down for the third quarter and $8 million on a year-to-date basis as compared to 2007.

I think as many of you – we’ve talked to you in prior calls and as many of you will understand, the major driver here is really the completion of our Titan program in 2007, which had about

$31 million in sales in ’07. We have been working hard in 2008 and we continue our efforts to replace this Titan business with NASA and defense [programs] the results of which we hope you will see as we go forward.

With respect to Real Estate, the year-to-date totals include proceeds from the sale of 400 acres of the Sacramento land to Elliott Homes for $10 million in cash which occurred earlier on in the year.

Talking next on segment performance, which you know as a non-GAAP financial measure and is defined in the operating segment information table included in our release that we issued earlier today. Aerojet’s segment performance for the third quarter, excluding environmental remediation provision adjustments, retirement benefit plan expense and unusual items, was $16.3 million representing a 9.5% return on its sales.

This compares to $22 million and an 11.2% return on sales for the same period in 2007. Margins in 2007 were helped by our favorable Titan contract. On a year-to-date basis, Aerojet’s segment performance in the first nine months of 2008 was $54.7 million representing a 10.3% return on sales compared to $65.7 million and 12.2% in the first nine months of 2007. Again, 2007 margins were helped by our favorable Titan contract; 2008 margins on an overall basis for the first nine months of the year are holding up to our expectations.

Looking at our Real Estate segment and segment performance, it was $1 million for the third quarter compared to $1.4 million in 2007. Both periods reflect only our normal ongoing lease activities.

Commenting briefly on the other comments of continuing operation, our combined interest expense and interest income are slightly lower at $5.8 million in the third quarter of 2008 compared to $6.3 million in 2007. Third quarter 2008 corporate and other expenses were

$7.9 million compared to $6.2 million in 2007.

This increase is primarily related to higher legacy environmental provisions, $4.6 million in the third quarter of 2008 compared to $1.6 million in the third quarter of 2007. Partially offsetting this increase were some more workers compensation expenses as compared to 2007.

Turning next to our debt and cash flow positions, net debt which is total debt less cash as of August 31, 2008 was $383 million which represents a $29 million increase from $354 million as of November 30, 2007. The increase reflects the $35 million that was used to fund the Grand Tour Trust earlier on in the year.

Net cash usage for the year is used by corporate interest, retiree medical and legacy matters with Aerojet generating cash to offset these cash usages. And certainly the sale of our 400 acres early on in the year did also generate some cash. Essentially if you look at the cash usage for the quarter it’s pretty flat.

On an overall basis, excluding the transfer to the Grand Tour Trust for the full year basis we still do hope to be in a breakeven cash flow position or in a slight cash generation position for the full year as we pretty much consistently stated from the beginning of the year.

Our liquidity position of core brand remains good with cash balances of $58 million on the hand and an un-drawn revolver of $80 million.

With that I’d like to turn the call back to Scott for his comments.

Scott Neish

Looking at our operational performance the third quarter was marked by a number of positives, including most notably the successful completion of the qualification testing of Aerojet’s boost motor for the Terminal High Altitude Area Defense program. These tests clear the way for Aerojet to deliver qualified boost motors to the U.S. Army for fielding in 2009.

Our work on NASA’s Orion crew and service modules continues to make excellent progress and passed significant development milestones. The program successfully completed a number of engine tests and reviews, paving the way for the first deliverable flight motor associated with NASA’s space shuttle replacement program. The first Orion jettison motor is scheduled for delivery later this year.

Aerojet received authority to proceed on development and qualification on stage one propulsion hardware for the Taurus II launch vehicle. This contract from Orbital Sciences will ultimately qualify hardware and deliver NK33 engines for flight. Orbital’s first flight of the Taurus II vehicle is planned for December of 2010 and will demonstrate capability to re-supply the International Space Station for NASA and provide another launch vehicle for the commercial market.

On the defense side of our business, Aerojet shipped its 10,000th fire suppression system for the Ford Crown Victoria Police Interceptor. This is a significant milestone for this safety system and the shipments of the current system will exceed our original sales forecast for the year as a result of the program extension into 2009.

Other programs strengthening defense revenues include the guided MLRS program, the [Tobe] Missile Program and SM3 [Tdax]. Aerojet’s ongoing solid rocket motor development missile defense systems, warhead and production contract performance continues to give us additional opportunities to strengthen our portfolio.

Turning to Real Estate, we continue to make meaningful advances on our major projects. On Glenborough at Easton and Easton Place projects Sacramento County has begun its work on the final environmental impact report. The Planning Commission unanimously voted to recommend approval to the Board of Supervisors at its July 8 meeting. Hearings went very well with support voiced by commissioners and no public opposition testimony. We still anticipate receiving entitlement from the County Board of Supervisors by the end of the year.

With that, we will open the call up for questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Unidentified Analyst] – J. P. Morgan.

Unidentified Analyst – J. P. Morgan

If we start out at Aerojet just sort of looking for some insight into the top line, both the near term and I imagine there’s some more visibility into next year. Would we expect revenues to be higher year-over-year in fourth quarter? And also fourth quarter has been traditionally the highest revenue quarter for the company. Would we expect that to be the case again in 2008?

Scott Neish

We do expect to see an increase in revenues in the fourth quarter over the third quarter. It will be about the same as the fourth quarter of last year and we have some opportunities there.

Unidentified Analyst – J. P. Morgan

And as you look out to next year what kind of opportunity do you see to grow the top line? I imagine there’s some visibility there. And also if you could comment on the appropriations bill that Congress passed earlier in the week, and how that makes you feel either better or worse about the opportunities for the company going forward?

Scott Neish

First the passage of the continuing resolution and it looks like we’re going to have both defense and NASA authorization bills and we are encouraged by that. We don’t see anything damaging to us in either of those bills and we believe that they are going to be consistent with the plans that we have going forward. We are in the process of putting together our plan for next year and it’s too early for me to share any specific numbers with you, but we do expect to see a healthy increase in both top and bottom line for next year.

Unidentified Analyst – J. P. Morgan

And what do you think some of the potential drivers are going to be for next year’s growth?

Scott Neish

Well Orion is going to continue to be a very important program for us and we’re going to see probably an increase in that program that I just talked about. And some other increases are possible in the area of missile defense. Also the commercial launch market, both entrepreneurial space and the NASA [Cox] programs are going to be positive for us.

Unidentified Analyst – J. P. Morgan

If we talk about margins at Aerojet, I see they’ve sort of bounced around a little bit this year. And if you’ve talk about what the outlook is going forward, what was the impact of the Atlas program on margins this quarter? I know it was probably quite positive in the second quarter. And also I know there were a couple of issues earlier in the year that held margins down. Have all of those been resolved?

Scott Neish

I’m going to let Yasmin talk to that.

Yasmin Seyal

Seth, the issues that we had earlier on in the year are behind us. I think overall we’ve said our goals for Aerojet is to have margins on a double digit basis. And I think you’ve got to again look at that on a full year basis, because from quarter to quarter depending on the mix of our contracts and the delivery of our contracts and products you will have a little swing. And I think if you look at Aerojet historically that’s always happened. But on the year-to-date basis we certainly are striving to have the double digit margins and are certainly doing our level best to see what can we do to improve upon that goals.

Scott Neish

With regard to the Atlas program, the Atlas program is performing at that double digit goal and we expect that to continue. We actually did a little better than that last year and that was primarily because we were able to avoid some problems that helped us in the performance of that contract.

Unidentified Analyst – J. P. Morgan

And then just the terrible accident that occurred last week, is that going to result in any shutdown that would have an impact on Q4?

Scott Neish

The shutdown to the facility is going to be relatively minor. The affected area was 2,000 to 3,000 square feet on a 1,000,000 square foot facility and we expect that it will be fully functional at the facility within another week. And we should be able to make up for that disruption before the year end. Our concern obviously is with the employees and we want to make sure that they are healthy and prepared to go back to work in a safe fashion.

Unidentified Analyst – J. P. Morgan

On the Real Estate, it looks like we’re coming up on the possibility of entitlement for Glenborough within a couple of months here. Is there anything you can say about sort of what comes next after the entitlement?

Scott Neish

No, our primary focus is really on Glenborough at this point. We need to get that one done.

Unidentified Analyst – J. P. Morgan

I wonder if you could talk about the delay in announcing a strategic plan for the company and sort of maybe what some of the sticking points are there and if there’s any kind of timetable for when we might be able to expect it?

Scott Neish

I don’t think there are really any sticking points. As you know we’ve had a couple of new members come on the board just very recently. And it’s really more a matter of getting everybody up to speed and the board coming to a consensus about number one, what the options are and what we should do with those options. So there really aren’t any sticking points. It’s just the process is taking a little bit longer than we anticipated and of course the current market disruptions are not helping. That tends to de-focus people unfortunately.

Operator

Your next question comes from Andrew [Sudoti] – Markstone Capital.

Andrew Sudoti – Markstone Capital

I’d like to start with Aerojets. Overall how should we be thinking about Aerojet’s organic growth rate going forward? Is this a business you think that you will be growing in the low single digits, mid single digits, high single digits? Just how should we kind of look at this?

Scott Neish

We anticipate a high single digits growth over the next five year period.

Andrew Sudoti – Markstone Capital

When do you expect that to begin? In fiscal next year?

Scott Neish

Yes we do.

Andrew Sudoti – Markstone Capital

And then on individual programs, some individual programs how much revenue does Orion currently contribute and how should we think about that particular program’s growth trajectory going forward?

Scott Neish

Orion is currently in the $50 million a year range and we expect some growth in that but frankly it will be limited by government funding.

Andrew Sudoti – Markstone Capital

So you expect Orion to be - from what you said you expect Orion to be flat next year? Down versus what you have this year?

Scott Neish

We hope it will be up but it will be modest.

Andrew Sudoti – Markstone Capital

On the Cox program, can you give us an idea what the revenue opportunity associated with that particular program is? And exactly what kind of work will you be performing on the Cox program?

Scott Neish

We’ll be performing – we’ll be part of designing and building the first stage propulsion system and probably some upper stage propulsion as well. I really can’t give you any numbers because we’ve not definitized our role, our scope in that contract yet.

Andrew Sudoti – Markstone Capital

You mentioned earlier in the call that you would be delivering engines. I don’t know if it was AG33 or AG26 engines to the Taurus II launch vehicle. What are we talking about? About

$1 million per engine, $5 million per engine? Just kind of like to get a handle of what price you get for that engines.

Scott Neish

They are actually – I said MK33 engines. They’re actually AG26 engines and there is quite a bit of value added to those engines before we deliver them so the answer to your question is a little difficult to quantify because as I say there’s work done on the engines before they’re delivered. And in fact after they’re delivered as well, and that’s some of the scope that we’re sorting out. But the engines are in the low millions per engine depending on how you – low single digit millions depending on how you allocate that scope.

Andrew Sudoti – Markstone Capital

And these engines if I recall correctly were basically written off a couple of years ago or so?

Scott Neish

That’s correct.

Andrew Sudoti – Markstone Capital

So what will be the margin impact when you start delivering these engines? Presumably I would think if Taurus II is the first vehicle that’s going to be launched, I think the test is in 2010 I would expect you would probably start delivering some of these engines maybe late next year. Does that sound reasonable?

Scott Neish

Yes. That’s right. And the margins will be helpful. It isn’t going to replace the Titan program but certainly they’ll be helpful.

Andrew Sudoti – Markstone Capital

Just going over to the Real Estate can you separate land that has been cleared of environmental issues from the rest of the company? And if you can’t why not?

Scott Neish

Well the simple answer is that you can. But the process may not be quite so simple.

Andrew Sudoti – Markstone Capital

Well then can you maybe talk about what some of the nuances that you have to deal with in terms of separating some of the real estate from Aerojet is so I kind of get a better understanding of what you’re dealing with there?

Scott Neish

Well that’s one of the things that the board is looking at currently, at what our options are in that regard. So I really can’t give you any specifics because we’re still looking at what the options are. But the issue of course is that there is a continuing environmental legacy associated with that land and Aerojet has a responsibility regarding that liability. And it’s really just how you deal with those issues.

Andrew Sudoti – Markstone Capital

Is any of the real estate pledged to banks as part of the credit facility? Is that part of one of the nuances you have to deal with?

Yasmin Seyal

Yes Andrew most of our real estate assets are collateralized against the bank facility and obviously depending on our transaction and the nature of a transaction you’re ever undertaking, you always are in discussions with your banks.

Andrew Sudoti – Markstone Capital

In terms of partners for the Real Estate, how would you characterize interest from potential strategic partners at this point?

Yasmin Seyal

We’re always talking. We’ve been talking for years. We’ve been talking to potential partners and we always continue to talk to potential partners. The question is always, always comes down to economics and I think that’ll always be the question that it will come down to in the future, too. What is somebody willing to pay or put on the table for the Real Estate, in whatever form or structure that it takes?

Scott Neish

The fact is the market right now is not very healthy and there’s just not a huge amount of interest right now. And so we’re very focused on getting our entitlements rather than on what we’re going to do with the land in the short term.

Andrew Sudoti – Markstone Capital

But I do know you have $158 million capital loss carry forward that expires I believe at the end of next year. I was just wondering if you could maybe talk a little bit about how you might utilize that particular and how you may try to capture that before it expires?

Scott Neish

That’s one of the things the new board is working on.

Andrew Sudoti – Markstone Capital

You also have an ordinary NOL as well. And I guess I was wanting to get an understanding of how does the ordinary versus the capital NOL impact how you might monetize your Real Estate going forward?

Yasmin Seyal

We’ve got an ordinary NOL of $220 million. The ordinary NOL has got a long life on it – expiration life on it. And as you know the ordinary NOL can be used against offset operating income. We hope we get rapidly into the position of generating operating income as a company and are able to start using those NOLs. And as you can see by the performance in 2008, the company’s operating performance is definitely producing income, etc. So we’re well on the way to using NOLs as we go forward.

Andrew Sudoti – Markstone Capital

And my last question would be on your new strategic plan that you’re working on, is it reasonable to assume that this plan will not be announced until after a new CEO has been appointed and he or she has had the opportunity to kind of review the operations and have their input into it?

Scott Neish

Well again that’s one of the many variables the new board is working on.

Operator

And we have no further questions in the queue.

Scott Neish

Thank you for being with us this morning.

Yasmin Seyal

Thank you once again for joining us on this call and we look forward to talking to you when we announce our year end results in January. Thank you.

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Source: GenCorp Inc. F3Q08 (Qtr End 08/31/08) Earnings Call Transcript
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