Centrus Energy Corp (LEU) 2003 Q2 法說會逐字稿

Good day and welcome to the USEC Inc. second quarter 2003 earnings conference call. This call is being recorded. With us today from the company is Mr. Hal Shelton, CFO, and Mr. Steven Wingfield, the Director of Investor Relations. Mr. Shelton will make his opening remarks, which will be followed by a question-and-answer period. At this time, I would like to turn over to Mr. Steven Wingfield. Please go ahead, sir.

Good morning and thank you for joining us for USE's conference call regarding second quarter that ended June 30, 2003. Before turning the call over to Hal Shelton, I would like to welcome our callers and those listening to our Web cast via the Internet. This conference call follows our earnings news release issued yesterday after the market's close. That news release is available on many financial Web sites as well as our corporate Web site, 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 like to remind everyone certain of the information we may discuss in this call today may be considered forward-looking information that involves risks and uncertainties, including assumptions about the future performance of USEC. Our actual results may differ materially depending on a variety of factors that we have 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, July 31, 2003. 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 now I'll turn the call over to Hal.

Thanks Steve. Good morning to everyone and thanks for joining us for our conference call. Also with me today is Dennis Spurgeon, EVP, COO, Nick Timbers, our CEO, is traveling and will not be joining us this morning.

We had a very good operating quarter. The numerous steps that we've taken to lower our production costs are having a positive impact on our bottom line. We are also seeing the positive effect of lower purchase cost from Russia. These have combined to reduce our unit cost to SWU sales, improving our gross margin over the first quarter and over the same quarter last year. The result is net income of $4.3 million.

Taking into account this year's accelerated American Centrifuge program spending and last year's special credit, income from our core business activities in 2003 is higher than comparable periods last year, resulting from higher gross margins.

Let me go through some of the highlights of the earnings report we issued yesterday. Revenue for the quarter was $322 million, which was an increase of 2% over the same quarter last year. We had $52 million in natural uranium sales, including uranium purchased from third-party suppliers. SWU revenue decreased $22 million based on 3% volume decline quarter-over-quarter. Timing and movement of customer orders often occur from quarter-to-quarter and cause shifts in revenue and that is the case during this period.

Our cost control efforts are reflected in lower unit production costs. Year-to-date unit production costs were 4% lower, reflecting lower labor cost and more efficient operations. Purchase cost also declined as new market-based pricing terms with Russia went into effect on January 1.

USEC employees, the monthly average inventory cost methodology and maintain significant inventories, both of which caused full impact of cost savings to be realized over time.

Over the past three years USEC has taken a number of significant steps to reduce costs and we are now seeing the benefits, a lower average cost per SWU. While the average price billed to customers was down a few percent quarter-over-quarter, the lower cost of sales improved our gross profit margin. We expect the average price billed to customers to decline by 1.5% in 2003, a smaller decline than in recent years.

The gross margin was 12.6% during the quarter compared to 9.7% in the same period last year. For the full year we expect a gross profit margin of at least 10%. Quarterly cash flow from operations was $43 million, compared to $84 million in the same quarter last year. For the six month period cash flow from operations was $23 million compared to $271 million for the first half of 2002. The main difference in the two periods is timing of collections for trade receivables last year. Recall that a large share of our 2001 sales came at the end of that year, therefore, the cash collected from customers came in the following quarter, the first quarter of 2002.

Also, we had significantly lower payments to Russia in the first half of 2002, when we were negotiating the new pricing agreement.

We ended the quarter with a cash balance of $158 million.

Looking below the gross profit line on the income statement, the biggest difference between the first half of 2003 and the same period last year was spending on advanced technology. We are working towards demonstrating the American Centrifuge and spending in the first half of the year was $13.7 million higher than in 2002. This obviously has a direct impact on net income. We see this spending as an investment in USEC's future. We have often said that the nature of our business with its multi-year contracts requires a long-term view and that our performance is best viewed over the longer term. That same long-term vision is behind our spending on the American Centrifuge technology.

We are pleased to report continued progress with the American Centrifuge. We expect to achieve our fifth milestone of manufacturing a rotor tube ahead of the November 30, 2003 target. Engineering, manufacturing and testing of major components continues at Oakridge, Tennessee. We continue to beat our schedule because we are sharply focused on demonstrating and deploying the American Centrifuge technology as rapidly as we can. This progress has given us the confidence to accelerate the schedule by one year. We now plan to submit our commercial plan NRC license application in August of 2004, seven months ahead of schedule.

Beginning commercial centrifuge operations earlier should bring substantial savings by enabling USEC to replace higher-cost production a year sooner.

I want to make one point very clear. We have not changed our estimate for spending on the American Centrifuge demonstration. We still expect to spend $150 million, we are just spending it sooner. We have also not changed our estimate of 1 to $1.5 billion to construct a $3.5 million SWU commercial centrifuge plant.

This accelerated spending will have an impact on net income and cash flow, increasing this year's spending to about $45 million. We will have an after-tax effect of lowering net income by about $5 million because under our accounting practices we expense all of these costs.

Looking at other parts of our business, we are now closer to resolution on several matters that have been pending for a number of months. First, USEC continues to clean up a portion of the 9500 metric tons of contaminated uranium that DOE transferred to the company prior to privatization.

We are on track to clean up the initial 2800 metric tons of the material by the September 2003 target date. DOE is compensating USEC for this cleanup activity. We expect DOE will provide an additional 2116 metric tons of natural uranium that was obligated to transfer to USEC by March 31, 2003.

Second, in another matter related to DOE, USEC is close to reaChang agreement regarding coal standby contract services at the Portsmouth plant. We expect to conclude negotiations on the definitive contract this quarter and we expect to earn fees and collect retainage retroactive to July, 2001, once that contract is signed. We are in discussions with DOE about cleaning up additional contaminated uranium, site preparations for the American Centrifuge demonstration facility and continued coal standby services beyond September 30th and we expect funding for these programs.

Third, last week DOE informed USEC that it would not extend funding for uranium deposit removal programs at the Portsmouth plant beyond September 30th. USEC performs this work as a contract service.

USEC continues to work with DOE to secure additional funding for this important decontamination project but has begun preparations to lay off approximately 116 USEC employees. If the funding is not secured we estimate USEC's share of the severance expense would result in a charge against earnings of 1.5 to $2 million, which would be recorded later this year. The impact on government contract services income will be minimal.

Last November we announced a 200 employee workforce reduction at Paducah in 2003. During the strike, the company identified additional efficiencies at the Paducah plant and expanded the total reduction to 219 positions, which we completed this month. We expect annual savings from this workforce reduction of about $19 million.

In another labor matter, members of the PACE union returned to work on June 25, after an almost five-month strike at the Paducah plant. The new 8-year contract provides pay and pension improvement for employees, along with work assignment flexibility designed to increase efficiency of the plant. This is a good settlement and we are glad to have the 530 employees, represented by PACE, back to work.

The firm negotiating position we took during the strike and the actions we have taken to increase the efficiency of the Paducah plant are clear demonstration of our continued commitment to lowering production costs. We are now at the halfway mark in the year and now have a better view of our full-year earnings picture. Our core uranium enrichment business remains on track for improving gross margins to at least 10%. While the gross margin is improving from 6.6% recorded last year, the acceleration of the American Centrifuge project with its near-term higher spending levels have an impact on net income of $5 million.

As a result of this spending for the future, our guidance for 2003 earnings is in a range of 9 to $11 million, with several dependencies that we have listed in our earnings release yesterday.

In recent years USEC has shown lower earnings in third quarter, but changes in the timing and movement of sales from the second quarter should result in quarterly earnings pattern where net income will be more consistent in 2003.

On the cash side, our guidance for cash flow from operating activities is in a range of 30 to $40 million. The reduction from previous cash flow forecast is due to timing of customer collections and payments to Russia and additional spending on the American Centrifuge. Absent the timing issues, cash flow from operations would have been higher than our original forecast.

To wrap up, we hope you will recognize the great success we've made in reducing cost and in preparing our American Centrifuge demonstration. Accelerating the start of commercial centrifuge operations by one year while lowering our net income is a huge step forward and hastens the day that USEC will be operating the most-efficient uranium enrichment plant in the world. We hope you will share our enthusiasm for USEC's long-term prospects.

We've gone over a wide range of topics this morning and Dennis Spurgeon and I are ready to take questions. Operator, please prompt our audience for questions

Thank you, sir. If you would like to ask a question on today's call, you may do so by pressing star, 1. On your touch-tone telephone. Again, that is star 1 if you would like to ask a question. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star, 1 if you would like to ask a question.

We will take the first question from Brett Levy with Royal Bank of Canada.

Hi, guys, congratulations on all the progress you've made here. Couple of things. First, there has been a bunch of government rulings with respect to what they will and will not finance and also about sort of competitor technologies and their ability to enter this market. Can you put a little color around that? Then, the second question I had was clearly with you accelerating your timetable here, my sense is that sources of financing or joint venture partners or something like that for this billion to billion five project start to come to the floor more quickly. Can you talk about at least your rough thoughts on that front?

Brett, I will answer the second question first and turn to Dennis for the first question. On the financing, as we have said from the beginning when we first introduced this project and the size of the commitment we will have, that it was very clear that we most likely in fact will have partners of some type in helping us finance this very attractive project. It's too early to set in concrete what those arrangements would be like. But, clearly there will be people who will be building a plant, building the centrifuges. We have good customer contracts and there is a wide range of opportunities to have a partner of some type. Our plan is clearly to go through this demonstration program, to demonstrate the economics of this program, to reduce the uncertainties and so that in fact we can get the best step financing arrangements. Let me turn to now Dennis to answer your first question.

Your question on technology, there is a proposal by a potential competitor to introduce a centrifuge plant in the United States. However, we feel we have a clear technological advantage in terms of the maChane that we're proposing, the American Centrifuge. We are well into our demonstration plant, our lead cascade license process. The potential competitor originally announced it would be submitting a license application in January, 2003, and they have yet to submit that license application.

OK. Thanks very much, guys.

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

Good morning, Hal, good morning, Dennis. Were there any severance costs of the 219 people in the second quarter taken in the second quarter?

Tony, there were severance costs but we had previously established accruals for that, so there was no cost through the income statement.

Secondly, why did the interest expense go up by $700,000?

That was some amortization of the cost incurred back in September when we had our new bank facility, there was no new debt outstanding.

So, that will disappear at some point?

Correct.

When can we begin to see the cause billed to customers being flat or going higher?

Uh, the amount of debt -- the amount of decrease has been decreasing each year in prices billed to customers 1.5% this year and I would expect next year toward the end of next year we should have the inflection point.

Thank you very much.

We'll take our next question from Chris Dechiario with ISI Capital.

Good morning. Few questions. Is there any difference that you have noticed in the competitive landscape now versus a year ago, especially with sales in Asia and Europe either from Cogema or from Russia or anywhere else? Can you just speak to that and then I have a few questions about the numbers.

In terms of the competitive market place, we continue to see USEC is able to attract customers and earn our fair share of new business. You might have seen our press release about a month ago where we signed a significant contract with Exelon, the largest utility in the United States, a long term very attractive contract and we continue to secure our fair share of business around the world.

OK. You're not losing market share, excluding what is going on with Japanese reactors?

That is correct.

Can you quantify the loss in revenue and cash flow that you are expecting from the Japanese reactors in 2004?

The Japanese regulatory authorities made the customer in Japan take down their reactors for maintenance checks and they are approving one by one the returning of those reactors to service. They have approved 4 of the 17 back to service. The utility is getting permission to do several more this year. Obviously their attention is focused on bringing those reactors back into service. We will be having discussions with them in this fall about the refueling patterns and that will then determine what the impacts will be in '04. But, we don't have that information today.

Right, right. OK. Also, I guess your expectation of revenue from SWU sales was down a little bit from the previous guidance, $1.2 billion to 1.1, I assume that's due to the same one-time reasons that you explained for cash flow?

In fact since we reported to one decimal point, the difference is it is much smaller, about $50 million and its just clearly the timing and the movement between the years.

OK. Then, given the lower cash flow projections, are you expecting to have more like $120 million in cash at the end of the year as opposed to the 150 you were expecting previously?

Somewhere between the two numbers.

OK. Just a couple of more questions. Capex guidance is still 20 to 25 million?

That is correct.

How much cumulative uranium sales do you expect after 2003? Is it something on the order of $200 million, would be my best guess? Just try to get an idea of how long you have and how much in uranium sales you have going forward after 2003 before it runs out?

We have consistently said our uranium inventories, the amount that we generate through underfeeding will have a consistent level of sales through 2006.

OK. I have one or two more questions. I will let others ask questions and get back in line.

Thank you, Chris.

Once again, that is star, 1 to ask a question.

We'll take our next question from Don Ingham with Imperium Capital.

Actually, this is Steven from Imperium Capital. How is it going, guys?

Good morning.

Had a few questions for you. I see that you reduced production costs fairly significantly. We seem to be nearing inflection point with pricing. Given these trends can we expect gross margin to at least stabilize if not improve going forward into the next few years? Secondly, -- well, go for that one and then I will follow-up.

Clearly we have had great success over the last three years in taking significant actions to reduce our production costs. As you and many of our other callers know that we use an inventory methodology that tends to not have immediate recognition. So, some of the benefits that we've done more recently like the 219 folks that we let go this year will be showing up in our results and our production costs going forward. We will be giving guidance at the end of this year for 2004 and that is the time we normally talk about the next year's view.

OK, but even the production costs that you've, the ones you realized in first and second quarter we can expect to continue to impact the line?

Yes, production cost savings are permanent savings.

OK. You indicated that your operating cash, you expect 30 to $40 million for the year, even as you liquidate natural uranium. Can you elaborate what impact these items, the timing of them you've discussed in your release will have on the 2004 cash flow, will we have abnormally bullish cash flow?

I will address that relative to 2003. There are two particular timing issues related to lower cash flow in 2003. The first is payments to Russia. We will obviously have this year our full allotment of 5.5 million SWUs purchased from Russia. We expected those occurring in fourth quarter to be later in the fourth quarter and therefore, payment next year they are happening earlier in the fourth quarter with payment this year. The second going the opposite direction is our sales. We expected in the fourth quarter sales some of those to be earlier in October. They're happening in December, therefore, they will be collecting the funds of those in December. The net of those two items is approximately $90 million.

OK. So, we might even see cash flow nearing the -- free cash nearing 150 range up in '04 if my analysis is correct?

Again, we will give guidance for 2004 later this year.

OK. Do you anticipate cash flow being sufficient to pay the dividend as well as debt obligations for the next few years?

As you know, we ended the quarter at $158 million, this was midway between what we ended the year at 170 and what we ended the first quarter at 132. We have at the moment sufficient cash on hand. The Board of Directors takes the dividend decision very seriously. Every quarter they review the outlook, the ability of the company to pay the dividend and meet all its other obligations and most recently last week they announced the dividend for September 15th with a record date of August 22nd.

OK. Looking at the - trying to do a calculation of the centrifuge economics and my -- I think that you generally say what 95% electricity and 25% personnel cost, is that accurate?

Are you talking about centrifuge?

Yes.

Yes, basically we use about 5% of the power in centrifuge that you do for a gaseous diffusion plant.

So, basically it should take the cost of enrichment down from near $100 per SWU down to $50 per SWU and then you have probably a small cost of capital in there, as well. Given the fact that could be so accretive for potential suiter, I know you can't discuss whether you are in formal negotiations. Have you heard any rumors or whispers that may indicate possible suitors as Lockheed or even with GE that already have a FAB unit?

We can't comment on that.

OK, I assume you would entertain it if it was brought to your table?

The board of directors would look at any proposed transaction that was in the shareholder's best interest.

And lastly, I want to ask you and this sort of a non-topic, but there's an article in the July 14th Platt's Nucleonics Week that indicated Iran may be using Urenco technology for uranium enrichment. Do you know if there are any -- I don't know if you have seen this with customer response or governmental regulation, but I was wondering if you have any outlook or opinion on whether or not this could help you if in fact Urenco technology is being proliferated, any political repercussions that could help USEC?

Well, we'd be very happy to talk about our own technology and we do at the drop of that hat but we can't comment on something we are not a party to.

Great. Thanks, guys.

We'll take our next question from Scott Chan with Thomas Llody Butler.

Good morning, Scott.

Good morning. Thanks for taking my questions, sir. A few questions. Can you, we know we've talked about the cost savings for American Centrifuge, but can you give a better sense of the eventual cost savings that could be reaped from this and compare it to the current Russian contract?

Let's talk about the cost savings of the American Centrifuge versus our existing enrichment plant. As indicated on a previous call, it will use 95% less energy, power and we have about $300 million per year power bill that's clearly the number one indication. Second, the current staffing for enrichment plant that we have now is between 11 and 1200 employees and a new plant will utilize about 500.

OK. So, on a rough basis, considering current prices and what kind of gross margin is that translate into roughly?

At this point, you have to really be able to project cost of capital to be able to make that calculation and that's not something we're to at this point.

OK. Fair enough. Then, looking forward, what are the nature of the price increases you haven't seen on the new contracts coming on?

The SWU marketplace is consistently steady between 105 to $108 per SWU and it has been above $100 since April 2001.

OK. Then, the $19 million in annual savings from the Paducah plant, has that been included in the cash guidance that you guys have given and is that going to be realized moving forward in the next year?

It will be recognized moving forward. Only a portion will be in 2003, most will be reflected as it comes through inventory in 2004.

OK. What portion do you estimate for '03?

Those people just came off the payroll at the end of June, in fact the last small group is coming off the payroll this month in July. So, you're just now beginning to going forward get the benefit of that reduced payroll.

OK. Since they're just coming off, have you guys put it into your cash guidance or no?

Yes, it is included in guidance for '03.

OK. OK. Thanks a lot, guys.

We'll take our next question from Richard Greenberg with Donald Smith and Company.

Hal, could you just remind me, how many employees in total were running the plant during the strike?

We had about 650 employees, but they were working extensive overtime during that period, that's the salaried people.

OK, 650 and now after this reduction of 219, it's going to be down to how much?

You're talking about the total plant population?

Yes.

A little under 1200.

OK. My question, my point is, did you guys were you able to -- are you able to reduce the number of employees to the level of efficiency that you were running with the management employees? Does a contract allow you to do that? how many extra employees are running the plant now versus how many would you be able to run it if you had total non-union freedom?

That's always a hard question to answer. I think perhaps the best way to do that would be to go back and look at what we have done. If you go over this past since privatization, the company has cut roughly 40% of its workforce and producing the same amount of product. We have reduced just in the past two years about 600 people from our payroll. So, I think what we are doing is moving down as quickly as we prudently can consistent with the safe operation of that facility and consistent with our overwriting objective, not only safety, but not missing a customer order.

OK. Second question, Hal, on the SG&A, I keep hoping every quarter that that's going to come down. I mean, two or three years ago we were talking SG&A in 40 to $50 million range. Now, we are running at $60 million a year. I understand there is higher health insurance, pension and insurance cost, should I give up and assume going forward we're looking at SG&A of $60 million a year and you guys can't bring this number down?

I think it will be a little bit less than that when -- obviously you saw the numbers. We were on the same amount we had the second quarter of last year at 14.8. One difference we had this year in the quarter there was about $700,000 for insurance cost. I think it would be little bit less than the high number you've mentioned.

OK. On the bonds, you know, we've talked in the past about possibly doing something in advance of January 1, '06, $250 million issue. You do have some flexibility to be buying back the bonds, what is your current thinking on this topic?

As indicated in our last conference call, we are looking very closely at the bond situation, the '06 and the '09s. One of the things that we found out that the -- in the last quarter both the high yield market and ourselves moved the price up very smartly. We moved up in the low 80s and we saw prices between 95 and 96 which really accomplished what our bondholders were interested in and that was improved liquidity. So, we and the bondholders are very pleased with that.

OK. Great. Thanks a lot.

Once again that is star, 1 if you would like to ask a question. Again, that's star, 1 to ask a question.

We'll take a follow-up from Chris Dechiario.

Do you have any more information on when the 2116 metric ton uranium will be transferred by the DOE? And what their reason is for the delay?

We are fully confident the DOE will do that and meet their commitments. We have found in all our shareholders and bondholders have found when we work with the government things sometimes take a little longer than expected.

What reasons are they giving for not delivering it on time?

I don't believe they've given us a stated reason other than the issue is under consideration and in process.

You are confident you will get that and all the rest of the uranium that you are due?

Yes, Chris.

OK. Is there any question as to the patents of the American Centrifuge technology? Any potential patent infringement lawsuits or anything we should be worried about?

The technology was developed by the United States Government and so the technology itself, the technical base for it is owned by the government. We are the only company who has then attempted and has done improvements upon that technology.

OK. Thank you.

Mr. Wingfield, there appear to be no further questions. At this time I would like to turn the call back over to you, sir

This is Hal. Thanks everybody for participating in this morning's call. We value all opportunities to hear from our investors. We are excited about USEC's long-term prospects and remain dedicated to delivering shareholder value. Have a good day. Thanks.

This does conclude today's conference call. At this time, you may disconnect.