Centrus Energy Corp (LEU) 2002 Q4 法說會逐字稿

Good day and welcome everyone to the USEC, Inc conference call for the quarter ended Dec. 31, 2002. This call is being recorded. With us today from the company is Mr. William H. Timbers, the president and chief executive officer and Mr. Steven Wingfield the director of investor relations. Mr. Timbers will make his opening remarks, which will be followed by a question and answer session. At this time I would like to turn the call over to Mr. Steve Wingfield. Please go ahead, sir.

Good morning. Thank you for joining us at USEC's conference call on its stub year and quarter ended December 31 2002. This is Steve Wingfield, Director of Investor Relations. Before turning the call over to Nick Timbers I'd like to welcome both our callers and those listening via the Internet. This conference call follows our earnings news release issued yesterday after markets close. That news release is available on many financial web sites as well as our corporate website www.usec.com. Second, I want to alert all of our listeners that a full archive of our news releases and SEC filings, including our latest 10-K is available on our web site. A replay of this call also will be available later this morning on the USEC web site.

I'd like to remind everyone that certain of the information that we may discuss on this call today may be considered forward-looking information that involves risk and uncertainty, including assumptions about the future performance of USEC.

Our actual results may differ materially, depending on a variety of factors referenced in our news releases and periodic filings with the SEC. Please refer to our SEC filings for a more complete discussion of these factors. Finally, the information provided today is time sensitive and is accurate only as of today, February 4, 2003.

This call is the property of USEC. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of USEC is strictly prohibited. Thank you for your participation and now I'll turn the call over to Nick Timbers.

Thank you Steve and good morning to everybody. Thanks for joining us today on this conference call. Also with me today are Dennis Spurgeon, Executive Vice President and Chief Operating Officer. And Hal Shelton, Senior Vice President and Chief Financial Officer. Yesterday we reported our financial results for the quarter and the six-month stub period. As previously announced the six-month stub period is reported due to our change from a June 30 fiscal year to a calendar year. When we gave guidance in July and again in November, we indicated that the December quarter would be a loss. We also indicated that on the fiscal year basis the vast majority of our annual earnings would be made in the June quarter. So this loss was anticipated. We still see the June 2003 quarter as being our highest earnings quarter over the next calendar year.

Hal will go over the financial details in a moment, but I want to share my perspective on the results. Those of you who have been following the company know that most USEC's business activities, both revenue and cost elements, have a long-term horizon. For example, we are signing sales commitments today for enriched uranium deliveries starting later this year and continuing to the end of the decade. Conversely deliveries in 2002 and 2003 were contracted in the late 1990s. Consolidation of operations at our Paducah plant and staff reductions made over the last several years are starting to have a positive impact on our production costs.

And almost three years ago we started negotiations with Russia that eventually led to a landmark agreement that took effect last month in January. An agreement that established market based pricing for the next 11 years under the Megatons to Megawatts program. I list these facts to put our quarterly loss into context. Over the past several years USEC's management team has completed a number of initiatives to fundamentally change our company and the impact of those changes will be seen in 2003 and beyond. We've covered these initiatives on previous calls so I won't go through the full list. The steps we've taken to lower the costs of production and lower purchase prices from Russia are now in place. This should lead to higher gross margins in 2003 and beyond. A CEO is never pleased to report a loss for any period. This result, however, is not indicative of today's business climate. I'm heartened about our prospects because our operations and advanced technology project are going very well.

On the operations side, our production costs for the quarter was the lowest since the quarter ending December 2000, when we operated two plants and produced 45% more SWU. These results also validate our decision to buy additional electric power last summer.Because more equipment remained on line during the summer our employees were able to get the Paducah plant back to full production earlier and easier last fall.

Paducah's performance illustrates an important point I want to emphasize. This management team is committed to running a lean, safe operation. We're implementing best practices and looking for ways to lower our costs. That will remain a constant at USEC. However, we must continue to increase our operational productivity. I don't think we'll ever be done looking for ways to operate smarter, safer and more efficiently. The labor agreement with the Paper, Allied-Industrial, Chemical, and Energy Workers International Union, or PACE, at our Paducah Kentucky plant expired on January 31 of this year. On January 31 last Friday, after several weeks of negotiations, the bargaining unit that represents approximately 635 Paducah employees, or about half the Paducah work force, voted not to accept the company's latest offer for a new contract. At 8:00 a.m. eastern time today, the bargaining unit went on strike. I'm not going to debate the issues here. We believe we've offered a fair, competitive offer to PACE and that we've done everything we could to reach a fair resolution and to avoid a work stoppage.

The company will continue to operate its Paducah facility at current levels under a production continuity plan, which maintains safe operations by using trained employees. We are prepared to continue negotiations with PACE to reach a new contract. USEC does not expect any interruptions of its product deliveries to its customers.

Shipments from Russia are scheduled to begin later this month under the new market-based pricing terms. We look forward to seeing the impact of lower purchase costs in our financial results as we continue implementing this important nuclear non-proliferation agreement between the United States and Russia.

Moving next to advanced technology we have met our first two milestones ahead of schedule. Our employees are refurbishing a building that we have leased from DOE. And we have fabricated and are now testing a key centrifuge machine component. USEC announced in December that we will site the lead cascade for American Centrifuge in Portsmouth, Ohio at existing buildings designed specifically for centrifuge operations. USEC has scheduled a meeting with the NRC, the Nuclear Regulatory Commission, for February 19th to discuss our lead cascade application.

To recap, we're now seeing the positive impact on our costs from management's initiatives over the past couple of years. We've completed much of the restructuring of the company. We've begun a new phase of developing and deploying the American Centrifuge technology. This firm foundation enables us to consider opportunities for diversification and growth. Now I'll ask CFO Hal Shelton to provide an update on our financial results. Hal.

Thank you, Nick. For the stub year, that is, the six-month period ended December 31st, USEC recorded a net loss of $ 14.7m or 18 cents per share, in comparison the company had earnings of $4.8m or six cents per share in the same period last year. All of the current periods' loss was recorded in the December quarter. Revenue for the stub year was $707.8m, down from $860.6m in the same period last year. Let me go through some of the reasons for the loss, as well as the difference between the two years.

First, SWU volume was down by about one million SWU between the two periods. You may recall that in the prior period's December quarter we had record sales. So the difference is distinct. I'd also point out that in the quarter that followed those record sales revenue dropped to about $250m, which was near a record low. The difference between the two quarters was nearly $600m. So, again, the timing of customer deliveries plays an important role in our results. Because USEC's customers place orders under their long-term contracts generally on a 12 to 24 month cycle, quarterly or six-month comparisons of USEC's financials are not necessarily indicative of a company's longer term results.

Volume this period was also down due to reduced customer commitments. A few years ago, when our foreign competitors were violating U.S. trade law, we lost out on some sales opportunities. On the positive side, if we had made those sales, we might not have liked the financial results. Second, the average price billed to customers declined about 1.5%. As you know, most of our sales are under long-term contracts. And new contracts signed at today's higher prices will help to offset lower priced contracts in USEC's backlog. The down trend is moderating to one and a half percent decline in 2003, compared to two to three percent per year decline over the last several years.

Third, after signing the DOE USEC agreement in the June 2002, we accelerated spending on the American Centrifuge technology. USEC leased two buildings in Oak Ridge, Tennessee that we'll use to fabricate and test centrifuge components. We're also hiring staff with very specialized skills. Comparing the two six-month periods we nearly tripled spending on advanced technology. Our guidance continues to be we will spend about $150m, all expensed through 2006 for the demonstration phase. We're investing our profits in the new technology for the long-term competitive advantage we expect to enjoy when it is deployed.

SG&A was also up period over period to cover recruiting, relocation, compensation, higher insurance costs and an additional audit that was the result of moving our fiscal year to December 31st. Finally, we established an accrual for an environmental matter caused by the bankruptcy of a contractor who operated a depleted uranium facility.

Cash at December 31 was $171m, and there was no short-term debt. We did better than our projection of $150m. Cash flow from operating activities had an outflow of $69.5m. But this was expected because of the timing of payments for Russian deliveries which were concentrated in the second half of the year. USEC also bought additional favorably priced electric power during the summer for increased production, as Nick had commented on. And those disbursements are also in the six-month stub period.

Looking at the full calendar year 2002, these timing issues are more than offset by collections. Cash flow provided by operating activities was $201m for calendar year 2002. To help investors in the transition to USEC's calendar year financial reporting, the 10-K report to be issued in early March will provide financial statements for the past three years in calendar year format. USEC has excellent liquidity. In addition to the cash balance and substantial inventory, the company has a $150m credit facility available. We have not drawn on short-term credit in over two years, and have no near-term plans to do so. In today's environment, it is wise to maintain a safety net. We also believe the prudent path is to maintain a reasonable cash balance to provide support for the dividend and ensure adequate funding for advanced technology development. Moving next to our guidance.

USEC has reiterated its net income guidance in a range of $14 to $16m. USEC is investing a substantial portion of its profits in the American Centrifuge technology that will position the company to deploy the world's most efficient enrichment technology. Therefore the tax earnings guide for 2003 will be approximately $20m greater without this investment. We see revenue coming in at approximately $1.3b, which includes natural uranium sales of about $110m. Cash flow provided by operating activities expected to be in the range of $60-80m.

To reach the earnings set out in our guidance, we must: One, meet our revenue goal; Two, continue timely reductions in production costs; Three, conclude the definitization of the cold stand-by contract at the Portsmouth plant including fee negotiations; and Four maintain spending levels according to our budget. Those of you who have been following USEC for a while know that our earnings can vary significantly quarter to quarter. Our guidance for 2003 is that we expect to break even in the first quarter, followed by roughly equal net income levels in the second and fourth quarters. We anticipate a loss in the third quarter when sales and production levels are both generally lower than at other times during the year. To conclude, let me point out that USEC maintains a strong balance sheet. We have excellent liquidity, and we have taken a number of actions that will position the company to improve its gross margins going forward. Now I'll turn the call back over to Nick.

Thanks, Hal. Now we reported a wide range of issues this morning, and hopefully this has broadened your understanding of USEC. And now operator we're ready to take questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your telephone keypad. If you are on a speaker phone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 on your touchtone telephone to ask a question. We'll take our first question from David Schanzer with Janney Montgomery Scott.

Yes, good morning. Could you guide us a little bit as far as the dividend is concerned, and your outlook for it. And then secondly at one point in time going back, and I realize with the centrifuge being built there may be focus elsewhere at this point but there was some indication on your part that you would be looking at some businesses that were similar to the businesses that, the competencies that you folks felt that you had. I was wondering if that's still something that is of interest to you.

Dave, Nick. Let me answer the first -- the second question first and that is that in terms of other opportunities to expand and gRowe the business, the answer to your question is yes, we are looking at other opportunities. We're looking at ones that make sense for the company and that will provide value in long-term for the company and for the short-term as well. On the dividend, Hal.

David, as you and the other members on the call know, the board of directors last week approved the dividend payable on March 15th was a record date of February 28th. And we've paid that dividend consistently over the past. And as you know from our cash position and my comments, that's why we have a good level of cash on our balance sheet to support future dividend payments.

Thanks.

We'll take our next question from Tony Cillufo with Cillufo Associates.

Good morning Nick, good morning Hal. Just one question, when are we going to get the SG&A down?

Tony, I'll answer that. If you look at the published financials that we had attached to the earnings release, you will notice that while it is up over the six months, it has the -- the rate was higher in the first quarter of the September quarter and in fact is coming down a little bit in the December quarter. We went through a very detailed approach, you know, two years ago, to get our costs down to lower the complement here in the home office and we're very interested to maintain that. We did have a number of one time items in the current period relative to SG&A, particularly related to a couple hundred thousand dollars to conduct a second audit in conjunction with our conversion to a calendar year reporting. And with the staffing up of our advanced technology, we also have some one-time recruiting and relo costs in there. But we're paying very close attention to our SG&A.

Thank you very much.

Next we'll go to Brett Levy with Royal Bank of Canada.

As you look at the timing of the American Centrifuge technology spending, can you give us some sense as to how that $150m is separated through the next several years? And then the test plant, can you talk about sort of once that's up and running is that expected to be break even, net profitable, some sense as to kind of what this is intended to do, beyond the basis for a larger spending program later.

This is Hal. On a rough measure the $115m is spread almost equally over that time period. So five years, $30m plus or so per year gets you to the $150m. In terms of the plant that you were talking about, this is a demonstration phase. We are expensing the whole amount and this is a test facility. We will not be producing any material for sale but we will continue to recycle that material. We will use that to test the flow rates, the purity, and all the metrics that you need about that and the cost factors. So it is included in that $150m estimate that I gave you through 2006.

Thank you.

We'll take our next question from Terrence Ortslan with TSO Associates.

It's actually a follow-up to the previous question. So far you spend about $50m a year we assume.

When we started the ramp up this program in just July of this year, after we signed the agreement with the Department of Energy for access to that, and you can see in our financial statements, under the advanced technology line, in the six-month period we spent $16m.

Could you also give guidance for the CapEx, please. You gave the guidance for the other issues, but could you give the CapEx guidance.

CapEx would be in the order magnitude of $20-25m for calendar year '03.

Thank you very much.

Our next question comes from Steve Roberts with Northpointe Capital.

A couple questions. On the supplier that went bankrupt, what's the cost on that?

This was a vendor at a disposal facility for depleted uranium. There are a number of other people who had shipped materials to that facility and we will soon start negotiations with them. So I'd rather not negotiate this on a conference call and divulge how much we've set aside because that will hinder our negotiating position and not be in the shareholders' best interests.

Then on the strike, can you kind of tell us what order the major issues being negotiated.

This is Dennis Spurgeon. The basic issues were pension benefits, medical cost share, salary and those were the principal ones.

Not cut backs on staff or anything like that?

That was not an issue. That was listed by the bargaining unit as one that they were finding problem with in our position.

And then the inventories came down again? But sounds like you're getting a shipment of the Russian SWU coming in. Where do you see the inventories going this year.

Our inventories were down from June about $50m. I would anticipate that they would in fact grow in the next two quarters in the normal seasonal cycle that we have as we get ready for summer and early fall shipments when the plant is producing at a lower level. But I think it's quite conceivable that by this time next year inventories will be the same level this year if not a little bit lower.

And one last question. Have you seen any disruptions over your Japanese customers due to the plant shutdowns?

No. We have not seen any. It's possible there could be some slight effect next year, but we do not anticipate any at this time.

Thank you.

Just a reminder if you would like to ask a question, please press the star key followed by the digit 1 on your touchtone telephone keypad. We'll go next to Michael Rowe with Bank of New York.

Hi, two questions for you. One is how long can you run the plant with the workers on strike before you start to see some impact?

We are set up with our contingency plan to be able to run indefinitely.

Okay. Do you need the workers, then?

Obviously we have an excellent salary work force and we look forward to resuming discussions and getting them back into the plant.

Okay. Then the second question would be, are you considering buying back any of your bonds or your common stock in the open market?

Not at this time.

Thank you.

We'll go next to Brett Levy with Royal Bank of Canada.

This is kind of a follow-up on an earlier question as well. In terms of the types of businesses that potentially you could do additional contract revenue with the government, can you talk a little bit about around the details there? I mean just sort of what types of business USEC's skill set ties in well with as an additional source of revenue vis-à-vis potential government contracts.

That's one of them that can be an additional DOE services we do conduct services for DOE at our Portsmouth plant and in limited basis at the Paducah plant. So we're a contractor for the government. So there is an opportunity -- there are companies that do that throughout the United States in terms of cleanup of nuclear sites. We are also looking at other broader opportunities within the nuclear industry that may not necessarily be DOE cleanup projects. And so to the extent there's a business that we're involved in, it will be or look to, it is one that is complementary to the skills and resources this company has and not necessarily something that would be off the reservation and diverse from what we're currently doing. But it is focused in our interest is focused in the nuclear power fuel generation business.

I guess in terms of the size of the addressable market, is that something that five years from now could be a very large revenue and EBITDA contributor.

We're hoping it would be a significant one, yes.

Thank you.

We'll take our next question from Richard Greenberg, Donald Smith & Company.

If the strike is an extended one, will there be any financial impact that you can think of?

Rich, this is Hal. Clearly in the short-term, if people are not working, they do not get paid. And so that would be the most immediate impact. Clearly as that is indicated we do have trained work force there. They'll be working shifts. They'll probably get some overtime pay, which will [emirate] that a little bit.

Second question, Hal, have you done any work on -- and I know it's by no means certain -- but if President Bush's dividend bill passes the way he's proposed it, have you calculated how much your dividend would qualify?

Rich, as we all know, every day we read the paper and what the proposal is changes. So we're waiting to get some stability in that before we do all those detailed calculations.

Final question. Could you guys update us a little bit on what you're signing certain contracts, what SWU prices are running right now and then what uranium prices are?

The published data for SWU prices that you can get out of published indexes puts them in the $105-107 range. We'll comment on our own -- I'll just comment on what's published. And Uranium prices are in the upper 20s, at this point. Are you talking about Uranium or you're talking about Uranium Hexafluoride. The Uranium itself U308 is around $10, which we don't sell. Uranium Hexafluoride is in the neighborhood of $29-31.

Thanks a lot.

We'll take our next question from Steven Korn with Lowe's Corporation.

Good morning.

Good morning, Steven.

Could you comment on what the issues are regarding the cold stand by contract at the Portsmouth plant and what the financial impact is and what has caused the delay?

As you know, the cold stand by contract is basically one that we have been executing on since 2001, the summer of 2001 under a letter contract. There have been, -- it's just taken us longer than we would anticipate to finalize that contract. We believe we're close to having it, very close to having it finalized with the Department of Energy. And I think the final issues to resolve are the fees that we will get on that contract.

Are you getting paid currently?

Yes, we are.

Thank you.

We're being paid currently at 85% of the costs incurred. So that part of the contract renegotiation would be that we'd be paid fully for our costs and reimbursed for the 15% that we've not been paid since the summer of 2001.

What is the current loss rate, 85% of costs?

That is the cash issue. In terms of our books we're break even. In terms of the cost side. As Nick indicated we have little hold back on the cash.

There's a certain amount of cost then that you're not recovering. What does that 15% represent in a dollar amount?

It's about $12-15m.

Thank you.

Next question comes from Tony Iorfino with Muzinich and Company.

Just wanted to make sure I understand. Of the revenue guidance you gave for the year, just wondering if you can give us an idea of how much of that is pretty firm in terms of the contracts you have or what it depends on in terms of pricing.

As you know, this is a long-term contracting business. And so as we start each year, a significant part of that revenue is in the backlog. And that continues with this year as well. So upwards of about 90 plus percent is already in the backlog.

Thanks.

Thank you, everybody, for your attention this morning. It's a very important time for the company and we appreciate your commitment and support. Thank you and good morning.

This concludes today's conference. We do appreciate your participation. You may now disconnect.