Centrus Energy Corp (LEU) 2002 Q3 法說會逐字稿

This is Premier conferencing, please standby. Good day and welcome everyone to the USEC third quarter fiscal year 2002 earnings conference call. Today's call is being recorded. With us today from the company are Mr. William H. Timbers, the President and Chief Executive Officer and Mr. Steven A. Wingfield, the Director of Investor Relations. Mr. Timbers will make his opening remarks, which will be followed by a question and answer period. At this time I would turn the call over to Mr. Steven A. Wingfield. Please go ahead, sir.

Thank you for joining us for USEC's third quarter 2002 conference call. This is Steven A. Wingfield Director of Investor Relations. Before turning the call over to William Timbers, I would like to first point that we are webcasting our conference call on the internet and we welcome all of those who [_____] on that medium. This conference call follows our earnings news release, which is issued yesterday after markets closed. That news release is available on many financial websites as well as our corporate website www.USEC.com. Second I want to alert all of our listeners that the full archive of our news releases and SEC filings including our latest 10-K is available on our website. A replay of this call will also be available later this morning on the USEC website. I would like to remind everyone that certain of the information that we may discuss on this call today may be considered forward-looking that involves risks and uncertainties including assumptions about the future performance of USEC. Our actual results may differ materially depending on a variety of factor that we have referenced in our news releases and periodic filings with the SEC. Please refer to our SEC filings for more complete discussion of these factors. Finally, the information provided today is time conservative and is accurate only as of today April 25, 2002. This call is the property of USEC any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of USEC is strictly prohibited. Thank you for your participation and I will not turn over the call to [William Timbers].

Thanks Steve and good morning everyone. Many of you have seen the news released this month announcing Steve's promotion to head the IR department at USEC. Steve has been talking to shareholders as a member of the IR team since the first shares of USEC were traded in July 1998. Because communications with shareholders a high priority for USEC, we are pleased to have a strong continuity in this position. We also have a new member of the USEC IR team [Lorry Angeles Madria Sustis]. Lorry Angeles] has been working in our marketing department since 1999 and has an outstanding knowledge of the global enrichment industry. She is a valuable addition the IR team. Also with me today are Dennis R. Spurgeon Executive Vice President and Chief Operating Officer and Henry Z. Shelton, Jr. Senior Vice President and Chief Financial Officer. We have several things that we want to address this morning. So let us move straight to the topic that is probably of a greatest interest. Government approval of our agreement with Russia. In late February when we reached agreement with our Russian partner Techsnabexport on new market based pricing terms for the remainder of the Megatons to Megawatts program through the year 2013. That agreement is now being reviewed by both of the Unites States and Russian governments. As you might expect we representatives of both governments were involved throughout the negotiating process. So the contract terms were known when we signed the agreement. Nonetheless there is approval process that takes time and there is little we can do to accelerate that review. We understand that the process is moving forward and we look forward to its approval in the near future. We recognized the frustration that some shareholders have about how long the government approval process has taken. It has been almost two years since we have first reached a pricing agreement with Tenex. And so we share that frustration. But the signals from the US government indicate that approval is near. The negotiators recognize that the review process would take some time and is part of the government agreement we signed we ordered two shipments from Russia. I am pleased to report that we began taking delivery of the first of those shipments this week and expect to complete these first two shipments over the next month or so. Additional shipments in 2002 can begin following the completion of the governments review process. Briefly, our view in these discussions in Moscow was that the long-term benefits of a stable, economic market-based contract was the most important and we would make the short-term price concessions if necessary to reach these important goals. Beginning in calendar year 2003 the price will be determined using a discount to a market-based price. Calculated as a basket of US and international sue market industries. The positive impact of this pricing agreement will begin to be seem in the later half of fiscal year 2003 and continued through 2013. In consideration for this stable and economic structure for the future we agreed to expand the existing higher fixed cost methodology for one more year. Within this context 2002 is a pricing transition year. The price we paid in calendar year 2001 $90.42 per SWU will be also act applicable in calendar year 2002. Because the pricing contract in on the calendar year basis and USEC operates on a June 30 fiscal year. This price will be in effect for the last two quarters of the current fiscal year and the first two quarters of the fiscal 2003. We are pleased to have concluded an equitable long-term agreement with our Russian partner, because we believe this would be a wining contract for everyone involved. The US and Russian governments are very importantly our shareholders. This one-year concession should clearly benefit the company in the mid-to-long-term. We brought a strategic view to our negotiations with Russia. We are in this business for the long run and we saw contract terms that would settle pricing issues for the remainder of this agreement. We are managing a business rather than managing quarterly earnings. Resolving prices used with Russia for about half of our product supply is a key step in our plan to build a solid foundation for our core business. Short-term earnings will not be as strong as we would like. Long-term this agreement makes a great deal a sense and it will create shareholder value. We are also in the process of resolving some outstanding issues with the Department of Energy. Just as the Russian agreement will provide a solid foundation for our business the agreement we are working on with DOE will settle certain issues and give us a clear understanding of each other's response stabilities and commitments. We are still in negotiations, but we are expecting agreement to address several areas. First the maintenance of domestic enriched uranium production, second the deployment of and advanced technology enrichment facility in the Unites States and the extension of a cooperative research and development agreement with DOE involving the governments centrifuge technology. And third DOEs responsibility surrounding technician contaminated uranium transport to US prior to privatization. All of the areas that I have talked about this morning are part of our long-term vision for USEC. We think long range because we believe nuclear power will continue to an important contribution to meeting the world's requirements. Efficiency gains, improving economics, and outstanding safety record and America's nuclear power plant are giving utility executives the confidence to plan for new reactors. The record is impressive. Capacity factors from US nuclear plants are as nearly 90% a 36% improvement since 1990. This translates to more SWU sales for USEC. Three of the largest US nuclear operators planned to submit early site applications for new plant to the NRC. And USEC's customers in Japan, Korea and Taiwan are currently building or planning to build more that 20 reactors this decade. Individually, these are all significant taken together you can see why this company is bullish on the future for nuclear power and why we want to be the company that is feeling its growth. Eighteen months the market prices of our products have dropped to a low in the $78 to $80 range. We believed that this was a result of an unfair and illegal pricing by our European competitors. A yearlong probe by the government showed our suspicions for right and terrorists have been enforced on these foreign imports. Today we are seeing industry press reports of prices in the range of $105-$107 per SWU. We are obviously hardened by the resumption for fair pricing for our product. But I do want to remind you about the long-term nature of SWU contracting. There was slow open demand for enriched uranium in the Unites States in the coming year. So we will be a couple of a years before new contract at these higher levels begin to show up in revenues that is just the nature of our business. Now I will ask CFO Henry Z. Shelton, Jr to provide an update on our financial results. HENRY Z. SHELTON, JR: Thank you Nick and good morning. For the third quarter USEC reported net income of $4.3 million or $.05 per share. This is after a special credit of $4.2 million from a change in cost estimate for consolidating operations. For the quarter, net income before the special credit was $1 million. Last years third quarter had a net income after special tax credit of $45.4 million or $.56 per share, and operating earnings of $8.1 million or $0.10 per share. The special credit for the quarter results from revision of our cost estimate for planned consolidation established almost two years ago. Three factors led to this change. 1. The effect of consolidating transfer and shipping operation at Paducah. 2. The cold standby status of the Portsmouth plant. 3. A payment by DOE of its pro rata share of severance benefits. Moving to a discussion of operations despite higher revenue margins continue to tighten due to lower than planned SWU purchase and higher average inventory costs. Going forward the favorable impact of cost reduction action and Russian SWU purchases under the new market based pricing agreement will lower inventory cost and improve cost to sales. Looking at revenue quarterly sales totalled $249.4 million compared to $243.1 million last year. For the nine months revenue was $1.1 billion further demonstrating that the SWU revenue drop experienced in fiscal 2001 will be reversed in fiscal 2002. The difference between the two years is due primarily to timing and movement of customer orders. This higher volume is partially offset by a 2% reduction year-over-year of the average invoice price to customers. Uranium sales are an important part of our cash flow. Since as you know we have no cash investment in most of our uranium inventory. For the quarter uranium sales totalled $9.1 million this brings year-to-date uranium sales to $93.9 million compared to $16.4 million in the same period last year. We now expect the sales of natural uranium for the full year to be slightly over $100 million or closer to the level seen in fiscal 2000 rather than last years $87 million. Cost of sales for the quarter and nine-month period increased primarily to substantially higher SWU sales volume lower Russian SWU purchases and higher unit production costs. Cost of sales also reflects higher cost carried over an inventory from the less than optimal two-plant operation in fiscal 2001. Looking at the balance sheet cash at the end of the quarter was a robust $219.3 million. We have no payable due to Russia and no short-term debt. We anticipate ending the fiscal year with over $200 million in cash and no short-term debt. The principal driver of the stronger than anticipated cash flow is our decision to maintain constant production level during the current period, when we have not been receiving shipments from Russia, and thus we supplied sales from inventories. We expect to end this fiscal year with inventories that are about $200 million lower than last June 30 a reduction of about 13%. Going forward the inventory levels will be adjusted to reflect anticipated patterns of future customer deliveries Russian purchases and production volumes. Our goal is to find ways to maintain this lower inventory level and if possible to reduce inventories further. On Tuesday the Board of Directors voted to engage a new independent auditor PricewaterhouseCoopers. Arthur Anderson] has been our auditor since 1993. We appreciate the valuable professional services provided by our Anderson audit team. PWC will audit the company's finances for the fiscal year ending June 30, 2002. In January when USEC was negotiating the pricing agreement with Russia we withdrew the company's specific earnings guidance saying that earnings would be lower and cash flow would be higher than forecast last summer, although we are still awaiting government approval of the DOE. We have sufficient visibility on earnings for the remainder of the year to revise 2002 guidance. Based on earnings today and the outlook for the remainder of the year USEC expects earnings before the special credit to be in the range of $9-$12 million. Thus net income will be $13-$16 million. These earnings are lower than an initially forecast due to the one time confluence of many aspects of the Russian HEU agreement. Specifically, one the purchase of attractively priced commercial SWU that we requested to be sold by the Russians and had been part of a previous agreement was excluded from the current agreement by the US governments. Two, the new pricing provisions under the Russian contract were not implemented by January 2002, and three because new terms have not been in place the quantity of SWU purchase this year is lower than planned. Also a change in the companies inventory cost methodology to better match sales and production profiles was not implemented. Production levels this summer will be increased over the last year's amount, which will better remind sales in production. By producing at a more level throughout the year it mitigates the need to pre-produce and store products during the springs when summer and fall fails. And finally expenses were consultants involving several initiatives including the HEU agreement, the shareholder law suit and the successful trade case have increased our SG&A levels. We are very mindful of our SG&A expenses employment at headquarters have not increased since the staff reduction last spring. As I mentioned our cash flow has been quite strong due to inventory liquidation and uranium sales. As we now estimate the free cash flow before dividends will be approximately $150 million far better than the negative cash flow projected earlier. Looking ahead assuming the governmental approvals of a pricing agreement purchases from Russia for the calendar year 2002 will be the cost of $90.42 per SWU. As the calendar year expands to fiscal years this will be the purchase price for the second half of fiscal 2002 and during the first half of fiscal 2003. Therefore our cost for goods sold will start to decline in the later half of fiscal 2003. As a result we expect earnings will be roughly the same in fiscal 2003 as in fiscal 2002. We will see a more positive impact of earnings of a lower Russian purchase price and the effect of our cost cutting in the later half of fiscal 2003 and beyond. Now I will turn the call back over to nick.

Thanks Alan. I will take a moment to put our guidance in this context. First this $9 to $12 million amount to $12 million range is not a reflection of the real earning power of this company. The long-term nature of the enrichment business mean the tests that we have taken fixed our core business will take time to walk the way through to use it bottom line. The unfair and illegal pricing actions by our European competitors resulted in USEC signing sales contract in the $80-90 range that will pull down our average invoice price over the next couple of years. This will continue to put a squeeze on our gross margins in the near term. But the trade action we initiated has improved SWU prices for the long terms. Second, we have taken many tough steps to fix the core business. We are very nearly done with the initiatives that we set out two years ago. We can out turn our attention more fully on our long-term efforts to diversify our revenue base and to grow our business. The pricing contract that we have signed with Russia provides a stable economic long-term supply source fuel for USEC. There is a transition period and quarterly earnings will be depressed, but we are managing our business for the long-term and over the next 12 years this will be a good arrangement for shareholders. I want to address one question upfront it is probably on some shareholders line. After hearing a forecast that our earnings will be below our dividend a reasonable question might be can you still pay your current dividend. The answer is yes. We pay the dividend from cash and we see strong cash flow going forward. However, as you know decoration of the quarterly dividends it is a provacative of the Board of Directors and they take their fiduciary duty to shareholders quite service. There is a full discussion every quarter about our financials and our ability to pay the dividend. Board did this again on Tuesday of this week and to clear to the June 15th dividend. Now we have covered wide range issues of this morning and now operator we are ready to take questions from the audience.

Thank you. Today's question and answer session will be conducted electronically. Anyone wishing to ask a question may signal by pressing the * or asterisk key followed by the 1 on your telephone keypad. We will proceed in the order that you signal it and we will take as many question as time permits. Once again that is * 1 to ask a question. We will pause for just a moment. Our first question will come from [Chris Melindas] of Morgan Stanley.

Hi I just want to clarify something that the cash flow gained that was a result of selling down the inventory without making payments under the Russian contract that is not going to worse itself meaning you are not going to have the build up inventory going forward. HENRY Z. SHELTON, JR: That is correct. We see there is a permanent drawdown in the inventories.

Okay thanks.

And our next question will come from [Tony Celufo] of [Celufo Associates].

Good morning guys. How are you? Not that it is difficult to gaze in the crystal ball, but for you feel somewhat comfortable in projections then must be in that governments should be fairly standing off on the agreement and do not to this in the future or am I incorrect in that assumption.

We believe that as I said in the remarks that the government was aware of the terms in of digression agreement as we were conducting and conclude at the arrangement with 10-K and consequently what we believe based up on the knowledge that they should conclude their approvals both in Russia and in Unites States soon.

Thank you. Let me congratulate on a good job well done.

Our next question will come from [Michael Rowe] from the Bank of New York.

One question three questions actually. One would be on further inventory reduction I was curious if when you come to resolution when you ask the government on some of your natural uranium is that do you believe reduce inventories further and the second part of the question is what do you plan to use with your cash that you have today as well as future cash generation positive from further inventory reductions and then third it sounds like you are no longer plan on doing your changing your according possibly life which I thought will be helpful just to better understand your current cost to sell your product.

On the first subject this is Dennis Spurgeon relative to further inventory reductions the answer is yes and that involves a number of things that we are doing in terms of how we produce and then deliver our product to shorten our cycle time. So we have a combination of activities including an overall review of our inventory policy that we have concluded and are beginning to implement.

Okay. That was atleast for the SWU side or the natural uranium side you think is the most.

SWU side is what I am talking about the issue would be the other issue with the government and satisfying all the quality of the inventory that we delivered to USEC prior to privatization it is not one of reducing inventory that is just one of maintaining the quality of that inventory product.

Did you feel that inventory you need to keep that level of inventories assuming it is all meet your standards.

No it is no asset leveled in the future, but it will be a very gradual reduction in uranium inventory. HENRY Z. SHELTON, JR: Michael your second question was on cash. We the company will review our capital structure on a regular basis and at this point of time we have viewed it simply the retention of the cash a prudent thing for the company during its transition period particularly as we move from this transition of lower prices of SWU and higher prices of SWU there is a squeeze on our margins as I mentioned in our remarks also as we look to the future capital requirements of the company and our activities down the road, we think the retention of the cash is a prudent thing for the company and that is going to be our policy at this point in time.

And this is held shot into the aggressive third item when we originally talked about a inventory change we were talking about basically a new on suit within the average cost method, but we are maintaining the average cost method on a little different basis and now that does not seem appropriate given that we have more levelized production and we basically have a better matching of revenue and expense.

Okay. Thank you.

It is a reminder if you would like to ask a question please press the * 1 at this time. We will pause for a moment to allow you the opportunity to queue. We do now have a question from [Turns Otfund] from [TS Owen Associates].

Can you [_____] by your2 inventory decline that you mentioned to the end of June from what reference point was that again.

That was June-over-June. June 30, 2001 verus June 30, 2002.

And you said you are not sure uranium sales this year volume wise how you made the price number, is it volume wise would be less or more than last quarter.

The volume and revenue will be both greater than last year and in a par with the year before.

Can we have any guidance for next fiscal year.

Next fiscal year we gave the general guidance we will wait till the signing of the Russian HEU deal and the completion of our internal budgeting process before we come out with any more specifics, but I did say that will be about the same as this year.

Right thanks guys.

And there are no further questions at this time, Mr. Timbers I will return the conference to you for you're continuing and closing remarks.

Okay great thank you very much. We also appreciate your continuing interest in USEC and we wish you a good day and see you next quarter.

That does conclude today's conference call thank you every one for joining us today.