Centrus Energy Corp (LEU) 2003 Q4 法說會逐字稿

Good day and welcome everyone to the USEC Inc. fourth quarter 2003 earnings conference call. This call is being recorded.

With us today from the company is Mr. William H. Timbers, the President and Chief Executive Officer, Miss Ellen Wolf, Senior Vice President and Chief Financial 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 period.

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 for USEC's conference call regarding its fourth quarter and fiscal year that ended December 31, 2003. Before turning the call over to Nick Timbers, USEC’s CEO, I want to welcome our callers as well as those listening to our Webcast via the Internet.

This conference call follows our earnings news release issued yesterday after the markets closed. That news release is available on many financial Web sites as well as our corporate Web site, USEC.com.

Second, I want to inform all of our listeners that a full archive of our news releases and SEC filings, including our most recent 10-K and 10-Q 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 the 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 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 forward-looking information provided today is time sensitive and is accurate only as today, February 4, 2004. 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'd like to turn the call over to Nick.

Thanks, Steve and good morning, everyone. And thanks for joining us today on our conference call.

I will make a few introductory remarks and then I will turn it over to Ellen Wolf who will review our financial performance for the last quarter and for the year. With me today is Lisa Gordon-Hagerty, Executive Vice President and Chief Operating Officer. Together with Ellen Wolf, Senior Vice President and Chief Financial Officer and I've also asked Bob Van Namen, Senior Vice President to join us as well.

In December, Lisa Gordon-Hagerty joined us following the retirement of Dennis Spurgeon. Lisa comes to USEC with a stellar record in government serving most recently in the White House as a Director in the National Security Council Organization. She also has extensive experience in managing large, complex organizations and has hit the ground running.

Ellen joined USEC in December upon the retirement of Hal Shelton and we are very pleased to have her on our management team. She has an outstanding record of professional accomplishments with Bell Atlantic and American Waterworks and we look forward to her financial leadership at USEC.

We made one additional change to our senior management team in January. Bob Van Namen, who is with us today, was promoted to Senior Vice President. Bob had been Vice President responsible for our marketing and sales effort since 1999.

Together, these changes bring additional depth and experience to USEC. We think we have the right leadership that is clearly focused on creating shareholder value.

Next, I want to spend a few minutes discussing our continued progress towards demonstrating the American Centrifuge technology before I turn the call to Ellen to discuss our financial results.

In January, we selected Piketon, Ohio as the site, the state-of-the-art commercial centrifuge plant. When it is complete, the plant will employ what is expected to be the world's most efficient, uranium enrichment technology and have an initial production level of 3.5 million SWU by 2010.

That siting announcement followed several months of evaluations by USEC of two very strong proposals by Ohio and Kentucky. We were fortunate to have the option of two first class sites and outstanding workforces in Piketon and Paducah.

Both proposals contained economic incentives, underpinned by a strong community support. In the final analysis, the Ohio proposal offered the right mix of economic benefits, existing infrastructure, assurances concerning seismic conditions and schedule advantages for this new facility.

The selection of Piketon for our commercial plant follows last summer's decision to accelerate by one year the construction and operations scheduled for the American Centrifuge. This acceleration does not increase the total projected cost of the demonstration.

The commercial plant will be housed in the same existing buildings as the American Centrifuge demonstration facility. Because our centrifuge is expected to use only 5% of the power consumed in production by our Paducah gaseous diffusion plant, completing the commercial plant one year earlier has a substantial financial impact.

The Nuclear Regulatory Commission has completed its technical review of the American Centrifuge demonstration facility and we anticipate receiving a licensed to operate the facility in the near future. We expect to begin the demonstration next year and the centrifuge machines there will provide important cost, schedule and performance data before we begin construction of the commercial plant.

We plan to submit a license application for the commercial plant to the NRC this August.

Today, our employees are manufacturing and testing key centrifuge components at facilities in Oak Ridge, Tennessee and preparing buildings in Piketon for the American Centrifuge demonstration facility.

We are investing our profits in the American Centrifuge because we believe that it will create shareholder value over the longer term and make USEC a low cost producer of low enriched uranium. Because nuclear power generates 20% of the electricity in the United States, it is also an investment in the future of our nation's national and energy security and the nuclear industry.

The American Centrifuge will reinforce our position as the global leader in the uranium enrichment marketplace. Increasingly, Americans are recognizing the value and the clean air attributes of nuclear energy.

We believe this commercial Centrifuge plant will be the first of what I hope will be a new generation of nuclear power construction projects in the United States. That renaissance should create additional demand for our products for decades to come.

As we continue the demonstration of the American Centrifuge technology, we are working behind the scenes to evaluate various funding mechanisms for the commercial plant. We are confident that as the demonstration proves the efficiency of our centrifuge technology, the financial markets and other potential partners will find this to be an attractive investment. Now I'd like to ask Ellen to report on USEC's financial performance in 2003. Ellen?

Thank you, Nick and good morning, everyone.

I'm very pleased to be with you this morning on what will be the first of many calls where I will share the progress of this company. I want to take time for a minute here to thank those investors who have called to welcome me over the past two months and it is my intent to meet with many of you throughout 2004.

Now, I'd like to report on USEC's financial results for 2003. To begin with, the bottom line result for 2003 was a net income of $10.7 million, which was within the net income guidance that had been provided by USEC previously.

The main driver was the substantial improvement from 2002 to 2003 in USEC's gross profit and gross profit margins. Our gross profit rose from $92 million in 2002 to $165 million in 2003, an increase of 79% year-over-year.

While the average price per SWU invoiced to customers declined 1.6% during the year, we were able to achieve gross margin improvement through cost containment.

Before describing to you in more detail the results for 2003, I wanted to point out to you our new income statement presentation. To provide investors with a clearer understanding of financial results from our government contract services, we are now reporting these billings as a separate line item in revenue and the cost of these services as expenses. This change has no impact on net income.

While information about government contract services was previously available in our discussions of other income, and in the footnotes to the financial statement, we felt this new method made it easier for our investors.

I also wanted to remind investors that when evaluating USEC's financial results, it is important to remember the long-term nature of our contracts. These contracts are tied to our customers reactor refuelings that occur on a 12-to-24-month cycle. Therefore, quarterly comparisons of our financial results are not necessarily indicative of our long-term results.

Given that, total revenue for the fourth quarter of 2003 was $430 million, which was an increase of $48 million or 12% over the same quarter last year. For the full year, revenue was $1.460 billion an increase of $64 million or 5% over 2002.

SWU revenue decreased by $67 million based on a 4% volume decline from 2002 to 2003. This was offset by stronger sales of natural uranium to our utility customers which more than doubled year-over-year to $169 million, reflecting both higher prices and volume.

The new line item in revenue government contract services, shows an increase of $43 million or 34% over 2002. The principle reason for the increase was that the technetium or Tc 99 cleanup project at Portsmouth operated for six months in 2002 and a full year in 2003. That constitutes about two-thirds of the increase in billing.

Also, as we noted in our third quarter news release, we received fees for cold standby and uranium deposit removal services over a two-year period and a pension cost adjustment in 2003.

As noted earlier, our gross margin improved due to cost control efforts. We saw positive impact from the new market-based pricing terms with Russia and we've taken numerous steps that have lowered our production costs and are clearly having a positive effect.

These cost reductions have combined to lower our unit cost of SWU sales improving our gross margin to 11% this year from 7% last year.

Our cost control efforts are reflected in lower unit production costs. For the year, unit production costs were 3% lower than 2002 reflecting lower labor costs and more efficient operation.

USEC employs the monthly average inventory cost methodology and maintains substantial inventory. Therefore, the impact of cost savings is spread over a number of quarters, both in 2003 and in future quarters.

Below gross profit, three line items showed significant increase year-over-year. Advanced technology development, the provision for income taxes and SG&A.

The biggest difference between 2002 and 2003 was the spending on advanced technology. Nick has already spoken about our continued commitment to the American Centrifuge demonstration and that is reflected in our spending.

In 2003, advanced technology expenses, primarily centrifuge, totaled $44.8 million or almost double the spending level of a year earlier. These development costs were charged to expense and had the effect of reducing net income in 2003 by $27 million.

Now, shifting to our taxes. Our provision for income taxes went from a credit of $4 million in 2002 to an expense of $7 million in 2003. This change reflects USEC's income moving from a book loss in 2002 to a book profit in 2003 and the income tax provision reflects that change to profitability.

Selling, general and administrative or SG&A expenses amounted to $69 million, an increase of $15 million or 28% from 2002 to 2003. The largest component of this was a one-time increase in compensation expense of $8 million that was a direct result of supplemental executive retirement benefits from the early retirement of two officers during the fourth quarter.

Other SG&A items include an increase of $3 million in legal and consulting, an increase of $2 million for higher insurance premiums and an increase of $2 million for franchise taxes in Kentucky. We are continually looking at all of our spending, including SG&A expense, to see where we can lower expenses in 2004 and beyond.

Now, turning back to cash. Cash flow from operating activities in 2003 was $145 million compared to $201 million in 2002.

The results were substantially better than guidance due to the accelerated timing of customer collections and the movement of payments to Russia to the first quarter in 2004. In addition, a payment to resolve termination of a power contract expected to occur in December 2003 will now most likely be made in the first quarter of 2004. We ended the year with a cash balance of $249 million and no short-term debt.

Looking at other parts of our business, we continue to make progress on several pending matters. USEC continues to clean up a portion of the 9500 metric tons of contaminated uranium that the Department of Energy transferred to the company prior to privatization. As of December 31, more than 3500 metric tons had been decontaminated by USEC and is now marketable.

The Department of Energy is compensating USEC for this cleanup activity. In addition, we continue to expect the DOE will provide an additional 2,116 metric tons of natural uranium that it was obligated to transfer to USEC by March 31, 2003.

In our earnings release yesterday, we had provided guidance for net income and cash flow for 2004. Starting at the top, we expect revenues to be approximately $1.4 billion for the year, about half of our revenue is expected in the fourth quarter of 2004.

The revenue projection for SWU is lower than 2003, reflecting a decrease in orders from a Japanese customer with 10 power reactors temporarily shut down for special inspection. The delay in restarting the reactors postpones the utility's requirement for loading fuel.

Revenue from uranium sales and from government contract services is expected to be relatively unchanged compared to 2003. And we expect the company's overall gross profit margins to remain at about 11%.

Below the gross profit line, we expect SG&A will be reduced from the levels seen in 2003. We also expect to increase our investment in the American Centrifuge to $70 million.

Of this amount, approximately $50 million relates to development works and will be expensed and $20 million relates to the commercial centrifuge plant and will be capitalized. To date, all of the costs of the American Centrifuge demonstration have been expensed.

The $50 million expected to be expensed in 2004 will have the effect of reducing net income by about $30 million. Given the substantial investment in the American Centrifuge, USEC expects net income to be in the range of 6 to $8 million for 2004.

We expect to update this guidance at the mid-year point or when any significant events occur that would impact this.

Operating cash flow in 2004 is expected to be in the range of a negative 110 to $130 million. Capital expenditures, including the spending on American Centrifuge commercial plants, are expected to be in the range of 30 to $35 million. We anticipate ending the year with a cash balance in the range of 40 to $60 million.

You may recall that when USEC provided guidance for cash flow a year ago, 2003 was expected to have negative cash flow from operating activities. As noted earlier, several of the cash outflows that were anticipated in '03 have shifted into '04, which, combined with accelerated customer collections moving from '04 into '03, have contributed to the negative cash flow from operations anticipated for this year. Looking a little further out, we do anticipate returning to positive cash flow in 2005.

That concludes my comments and I'd like to turn the call back to Nick.

I'd like to wrap up with a brief look at how I, as CEO, view our company's performance in 2003. A report card, if you will, on how we managed USEC for you, as the owners.

First, we achieved all four of our 2003 milestones for the American Centrifuge ahead of schedule. Second, we accelerated the schedule for building and operating the American Centrifuge by one full year. Third, we optimized the efficiency of electricity at our Paducah plant, turning in our best performance since 1998.

We had a record year, $2.1 billion for signing new uranium enrichment contracts and contract extensions. We established long-term alliances with several major utility customers by signing multi-year, multi-plant contracts.

We were prepared for a 142-day labor strike at our Paducah plant, where we protected the operating and financial interest of the company. And last, but certainly not least, our shareholders enjoyed a 51% total return in 2003, a mark that handily beat the indices.

As you evaluate our performance and progress, I want to leave you with the six principles of management that we follow here at USEC because I believe these principles are relevant in today's business environment, where investors are taking a very close look at corporate governance.

Our six principles of management are one, do the right things for the right reasons for the right way. Two, our priorities here at USEC are safety, reliability and performance. Three, we identify our challenges, we say what we are going to do and then we do it.

Four, we are a team, we think and act that way. Teamwork is what defines us. Five, be persistent but also patient. And finally, six, we work hard for our shareholders because we are shareholders.

We've gone over a wide range of topics this morning and we're pleased to hear now from our investors to take your questions. So operator, please prompt the audience for questions at this time.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch tone telephone. Again, that is star one if you would like to ask a question. We'll take our first question from Tim Hassara with Kennedy Capital.

Good morning. Can you tell me roughly what the price of SWU is in the marketplace now and also the price of raw or natural uranium?

Well, there are two prices. What we deal with here at USEC, the short-term price or spot market price, which is a very thin market right now, is approximately 108 to $110 per SWU. The long-term price under multi-year contracts is about $105.

Natural uranium that we sell in the form of uranium hexafluoride is about $48.50 as quoted by two independent indices or index groups.

What was the price of that raw uranium or natural uranium three months ago or six months ago?

Oh, let me give you a flavor of it. Probably was about $15 less than that.

Okay.

That's a raw -- a guess there. Mostly because there are a couple of things that have been happening in the market that have been driving up not only uranium hexafluoride but the basic uranium of U308 and it's a question of supply demand. There is a view that there's a lack of adequate supply of natural uranium and uranium that's converted to uranium hexafluoride, but it has gone up quite significantly over the last 12 months or so.

And with respect to inventory of raw uranium or natural uranium that you're selling, where do I find that on the balance sheet? Or how much of that do you have on the balance sheet as of the end of December?

Sure. On the balance sheet you'll find in -- if you look under our short-term, it's included in our inventories under current assets.

Okay. And the inventories under other assets?

In other assets, what is listed there is the inventory that we received from DOE that we are in the process of cleaning up or that DOE owes to us as clean uranium inventory.

And is there a breakdown of the amount of inventory you have for natural, raw uranium on the current assets? Of the $883 million?

The current amount that we have in there is about $187 million.

And is that, I assume that's on your cost basis?

That's correct.

And that's in the 20s, is that correct, 24, $25?

That is about $25.

Okay. And just one other -- yes?

Can I make one observation since you're going through these uranium numbers is that what we sell any given year of natural uranium, of uranium that we recognize on our books, we sell from three different sources. One is that we sell it out of inventory. Two, we sell uranium that comes from third parties. And three, we sell uranium from underfeeding our gaseous diffusion plant.

So, what you see in terms of uranium revenue is not purely, completely out of our inventory, but from those three sources. And so I think the order, if you correct me, it's out of our inventory it's underfeeding and from third party sources in that order.

Okay. Thank you. And one other question. I assume with respect to a lot of the deliveries being made in the fourth quarter that your cash flow generation in the first quarter of '05 would probably be fairly substantial? Is that accurate? And...

That's correct.

All right. Is a lot of that done in the back end of the fourth quarter of '04 or closer to the front end?

A lot of is it in the November-December timeframe.

Okay. Thank you.

Sure.

We'll take our next question from David Schanzer with Janney Montgomery Scott.

Good morning, everyone.

Good morning, Dave.

Good to hear Ellen's voice again.

It's been a while!

I actually have three questions. First of all, as far as that cash flow balance that you were alluding to for the end of '04, I just wanted a clarification. That's after common stock dividend payments, the 40 to $60 million?

That's correct.

Okay. Good. A little bit more if you don't mind, explanation of the uranium sales outlook for '04. If you were going to think of it in terms of selling from uranium stock to others, the net number, correct me if I'm wrong, would be $100 million, the outlook?

I'm not sure, Dave, if we break it down in that manner.

Okay.

We just simply record it, you know, from a disclosure standpoint of how many uranium sales we make and how we break it down from sources we really don't --

Okay. And then lastly, there's been a lot of talk, articles, people alluding to the in fact that there's some competition, potentially trying to land on our shores. I was wondering what your perception was of the regulatory challenges that anybody would face opening up in New Mexico, competitive plant to the centrifuge that you're building in Ohio, what you see the progress of that being and so forth?

I don't know. [ Laughter ] Let me give you our perspective here is that first of all, we're focused clearly on developing American Centrifuge technology. That is one that takes a tremendous amount of both our time and our fiscal resources.

We certainly are aware that there are other activities going on. Our only observation about this, really, is that as we go through a process of regulatory reviews and evaluation of both the American Centrifuge and others, that it should be done in an open, transparent way that everyone should be able to see exactly what's going on. There should be open time for comment and discussion and there should be a level playing field.

That's important for two reasons. One, that's the way to have open competition in the United States and to have a balanced playing field. And number two, I believe very, very strongly in the future of nuclear power and this nuclear facility, whether its ours or somebody elses' in the terms of nuclear fuel, will be the first one licensed here in the United States in many, many years and can be the precursor for nuclear power plants being built here, as well.

The licensing process, the review process, the environmental review process is critical, is absolutely critical that we be open, transparent and the entire world sees exactly what we do and we do it in a safe and reliable manner. I just want to be sure that as we go down this road that we represent the nuclear industry effectively and are good people to show how we operate this business in an open and transparent manner.

These things, I think, are critical, critical for the future of this industry. And we intend to maintain our licensing process and our way in which we conduct our business in that manner.

Okay. Thanks.

We'll take our next question from Brett Levy with Royal Bank of Canada.

Hey, guys, two questions. First off with respect to the backlog, can you give us a rough sense as to what it is right now in an absolute number? And also the approximate timeframe to realize that backlog? When will the biggest pieces of it be coming through?

Okay, the current backlog is about 4.9 and I'm sorry, repeat the second part of the question?

Okay, so it's $4.9 billion. The second part of the question is, if you look at when that's going to start rolling off, you know, what's the approximate timing to realize the $4.9 billion?

It comes in over about a three-year period.

We have commitments, this is Bob Van Namen. We have commitments out through 2011 in our backlog but about three years worth of that backlog is going to be realized, about $2.9 billion within the next three years.

And is it substantially larger in 2005 than it is in 2004?

You know, this is Nick Timbers. The one thing I want to point out about backlog is obviously it continues to roll. There is backlog that rolls out of it into current production and then we have new sales.

Last year Bob booked a record of $2.1 million new sales of contracts. So, the backlog generally stays fairly level and consistent over time. We've been as high as 6.5 and I think we're probably down now into the, you know, $4.9 million. So, that's generally a good range that you will see this over time.

Anytime we go into a given year, we have booked and have ready to sell about 85% of our sales targets so that, you know, we're making up about maybe 15% of what's not been booked at that time. So backlog should be reviewed as a rolling amount as opposed to one that is depleting amount. It will increase, it will decrease based upon the success of sales and new contracts being secured by the company.

All right. And then the other one is with this new site selection, has the company or anybody else said whether or not this plant will have unionized or non-unionized people? Obviously you guys would like to have a little bit more flexibility with respect to your labor.

Basically we're not going to take a position on this. We're going to leave it up to, we're going to site this commercial plant in Portsmouth. There currently is a labor union at Portsmouth.

We're going to leave it up to the workers as to whether they want to unionize or not and we will not take a position either for or against it but we'll leave it to their decision and rightly so. It is their decision as to what to do.

All right. And then I suppose the other one that you guys probably can't comment extensively on is with respect to the full scale plant. Have you guys gotten, you know, third party levels of interest in joint venturing this with you? I mean is there sort of a lot of excitement around the potential investors in this plant along with yourselves that has sort of been coming your way as you've gotten closer to proving this technology?

Brett, that's an excellent question. There have been three levels of interest by outsiders of third parties as you describe them. First, there's a considerable degree of interest for EPC Contractors to build and invest in the plant at the same time.

Number two, there has been a high degree of interest by manufacturing firms to manufacture the equipment for this facility. Each time that we talk with these, we talk not just about entering into an EPC contract but also in terms of investment alongside with us.

And the third level is direct ownership participation and there are discussions and there is interest been shown in that regard. So that I think that you look at it from all three levels, from the engineering and procurement side, from the manufacturing side and from the ownership financial side.

Thanks very much, guys.

Okay, Brett.

We'll take our next question from Anthony Iorfino with Muzinich and Company.

Hi. I just had a question regarding the bonds that you have outstanding, which are, you know, coming a little closer to maturity and whether you had any particular plans and what your view of the capital markets regarding that possibility?

Yes, we are constantly looking at the value of the bonds we have outstanding, we're looking at market interest rates and we will be looking to find the optimal time to either refinance those bonds when the right interest rate is out there for the company.

And one other question. In given your openness, could you give us an update on your market share for SWU at this point?

Bob, you want to speak about worldwide market share and domestic here in the United States?

Sure. Our market share worldwide we remain a market leader with about 30% market share in the world and we are about 50% of the Asian markets and roughly 55% of the U.S. market.

Thank you very much.

And we'll go next to Tony Cilluffo with Cilluffo Associates.

Good morning, Nick, good morning, Ellen, welcome aboard.

Good morning.

Good morning, Tony.

Of the backlog, I assume that they're at the current prices? Most of the backlog should be at current prices?

The backlog has a combination of contracts which were signed several years ago. We still have some contract commitments that were signed prior to the trade case, but as Nick said, we booked $2.1 billion last year and those do reflect current market prices.

So, what will the average price invoiced to customers be? Will there be still a small makeup this year?

We're not prepared to talk about that.

Tony, basically what you're going to see is you're going to see the days of the $80 contracts rolling out. They are rolling out --

Rather quickly?

Really quickly. But at the same time some of the delays in Japan of those power plants there has delayed the rollout of those prices. At the same time that we see and I give credit to Bob having a record year of booking $2.1 billion of sales, and also, remember this is compared to, you know, our cost of production as where we get profit and we also see rolling in through our inventory the new price for the HEU deal and so that you see a fortunate combination or confluence of both lower operating costs, lower purchase costs and higher sales prices over time.

And it's hard to pin it down exactly, you know, on a day-to-day basis on this call as to how that works, but the trend is in the right direction.

Thank you very much.

Thank you, Tony.

Once again, it is star one for questions. And we'll go next to Chris Dechiario with ISI Capital.

Good morning. I guess along those lines and I missed the very beginning of the call, so I apologize if you already went over this, I guess you had said on the third quarter call that you sort of find the inflection point or improvement in year-over-year average SWU prices at the end of 2004 and is that still what you're expecting?

Yes.

Okay. And the only other question I have is just to try to clarify the changes here. I guess you had $66.5 million in cash and equivalents at September 30. You're talking about 40 to 60 at the end of 2004. So other than the changes in the timing of cash flows, you know, from this year into next year, you know, back and forth, are there any other differences, basically would you have gotten to the 40 to 60, you know, either way, you know, what are the differences are there other than just timing of cash flows?

The other difference that I think you should note is again, more money will be going out in the 2004 year for American Centrifuge. Our capital expenditures will be up about $20 million for American Centrifuge and approximately another $5 million for expenses or the research part of American Centrifuge. So that is a continued use of our cash investing in the future.

Okay. And other than that, is there anything else that's changed in your expectations from three months ago, you know, other than that on the timing of cash flows?

Other than what we've mentioned, which is the timing of the payments? No.

Okay. Thank you.

And there appear to be no further questions at this time.

Well, thank you very much for your participation in this morning's call. As always, we value all opportunities to hear from our investors. We are excited about USEC's long-term prospects and remain dedicated, as you know, to delivering shareholder value. So, thank you very much and good morning to everybody.

This does conclude today's conference. Thank you for your participation. You may now disconnect.