Centrus Energy Corp (LEU) 2004 Q1 法說會逐字稿

Please stand by. Good day and welcome everyone to the USEC Inc.'s first quarter 2004 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 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'd 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 the first quarter ended March 31, 2004. This is Steve Wingfield, Director of Investor Relations. Before turning the call over to Nick Timbers, USEC CEO, I want to welcome our callers as well as those listening to our web cast 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 websites, as well as our corporate website 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 10K is available on our website. A replay of this call will also be available later this morning on the USEC website.

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've 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 of today, April 22, 2004. 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'd like to turn the call over to Nick.

Well thanks Steve, and good morning to everyone, and thanks for joining us for our conference call this morning. Also with me today is Ellen Wolf, Senior Vice President and Chief Financial Officer for USEC.

We issued our first quarter results yesterday after the markets closed. Ellen will provide a detailed report on those results in a few minutes, but I would first like to give you my perspective on the quarter.

The first quarter results show a net loss of $11.2m. The company had fully anticipated this loss when providing our 2004 earnings guidance. This year our revenues are more heavily weighted towards the fourth quarter. About half the year's total will be in the fourth quarter.

If you look back several years, generally our revenue is lower in the first and third quarters and higher in the second and fourth quarters. That aligns with our customer's refueling schedules for their nuclear power plants. Refueling is usually done in the spring or fall when utilities take their plants off line, because the power demand is low. This refueling pattern plus the lead time that customers give us as to when they will pick their deliveries, gives us good visibility into our revenue several quarters out. And that is why we have confidence in our annual earnings guidance of $6m to $8m, which we reaffirmed in our news release yesterday.

As always I like to remind everyone that USEC's financial results are appropriately viewed over the longer term. Our customers generally place orders under long term contracts that are tied to reactor refuelings that occur on a 12 to 24 month cycle. Therefore quarterly comparisons of USEC's financials are not necessarily indicative of the company's long term results.

Our plant operations are going well. We continue to maintain a high number of production cells on line. That helps to improve the efficient use of electric power to produce low enriched uranium.

Shipments from Russia under the Megatons to Megawatts Program continue as scheduled. With the help of our Russian partner TENEX, that program is reliable and seamless.

I want to spend a few minutes discussing our continued progress towards demonstrating the American Centrifuge technology. In January we selected Piketon, Ohio as the site for our state of the art commercial centrifuge plant. And in February we received a license to construct and operate the American Centrifuge Demonstration Facility.

We have developed an open and candid relationship with the Nuclear Regulatory Commission and its staff. The staff recently complimented USEC on the high quality of our license application for the demonstration facility. It is our intention to develop a commercial plant license application that will also meet the same level of high quality. We plan to submit our commercial plant application in August.

We believe that our good working relationship with the NRC will help expedite the review process going forward. We are clearly building momentum in this project. We have accelerated our schedule for operating the commercial centrifuge plant. The selection of Piketon makes the acceleration feasible, because the commercial plant will be housed in the same existing buildings as the demonstration facility.

We expect to begin the demonstration next year. The operation of these initial centrifuge machines will provide important cost, schedule and performance data that is necessary before we begin construction of the commercial plant.

Today, key centrifuge components are being manufactured and tested at facilities in Oakridge, Tennessee and we have begun preparing buildings in Piketon for the demonstration facility.

As we work to demonstrate the American Centrifuge Technology we are also working behind the scenes to evaluate various funding mechanisms for the commercial plant. We are confident that the demonstration will prove the efficiency of our centrifuge technology and that the financial markets and perhaps other potential partners will find this to be an attractive investment, as we do.

The American Centrifuge is an investment in this company's future, and accordingly our reported earnings and cash flow reports today and in the future, reflect this vital investment.

There has been a number of significant news stories recently about the expansion of nuclear power and the prospect of building new advanced nuclear plants in the United States. The potential revitalization of the nuclear industry makes our investment in the American Centrifuge even more important to our nation's energy security. Our commercial centrifuge plant would be the first of a new generation of nuclear power construction projects in the United States.

Nuclear energy powers one out of five American homes and businesses. Many national security and energy security experts believe that nuclear power must continue to be an important part of our nation's energy mix. The American Centrifuge will help support nuclear power as the energy of choice for this and future generations of Americans who value clean air and domestic energy security.

I want to take this opportunity to commend the negotiating teams from both USEC and the Paper Alloy Industrial Chemical and Energy Workers Union, or PACE, for reaching an early agreement on a new contract with our employees in Piketon, Ohio. The two teams worked in a collaborative process to submit a proposal covering the next six years. That proposal was approved by our union employees at Piketon two months before the expiration of the prior contract.

We're pleased to have the issues resolved in a constrictive way that is a win-win for the company, our employees and the communities where they live. We now have a new six year contract in Piketon and an eight year contract signed last June by our PACE representative employees in Paducah, Kentucky, as well as two contracts covering our guard unions. With these agreements in place we look forward to a same period of developing an even stronger working relationship that emphasizes mutual respect and shared gains.

Now I'd like to ask Ellen to report on USEC's financial performance in the first quarter. Ellen.

Thank you Nick, and good morning everyone. As Nick mentioned, for the quarter we did have a net loss of $11.2m. That loss was anticipated and reflects events we were fully aware of when we issued our guidance back in February for 2004.

The revenue for the quarter of $180m is the lowest quarterly revenue that we've reported as a public company. The key factors affecting our lower revenues were the combination of low SWU volume and low average prices billed to our customers.

SWU volume was down 48% quarter over quarter. One of the factors in this decline was the postponed refueling by a major Japanese customer whose 17 reactors were shut down for special inspections last year. Twelve of these reactors have been restarted and the utility is now in a position to seek permission to restart the remaining five reactors. The shut downs have affected SWU volume for 2004, and will continue to impact our SWU volume, but to a lesser extent in 2005.

As it relates to the prices of SWU, prices billed to our customers were down 7% in the first quarter of '04, compared to the first quarter of 2003. SWU deliveries in the first quarter are mainly deliveries made under the lowest priced contracts we signed in the late 1990's. We expect average prices billed to our customers for the remaining three quarters to be higher. For the full year we expect 2004 average SWU prices will be just 1% lower than for the full year in 2003. This reflects the improved pricing of our more recent contracts.

In parallels with lower SWU sales, revenue from uranium sales were also down in the quarter. Uranium sales are often tied to the SWU sales to our utility customers. We are confident that on an annual basis uranium sales will at least equal last year's approximate $170m.

Turning now to cost of sales. The decrease in SWU volume resulted in a corresponding decrease in cost of sales, with cost of sales decreasing 44% from the first quarter 2003 to the first quarter of 2004. Cost of sales was also lower in the first quarter of '04 than in the first quarter of '03, due to a lower inventory unit cost.

[Cree's] reuse initiative that had reduced production costs, the strike in Paducah in 2003, and the lower purchase cost related to the Russian contract, contributed to the lowering of the inventory unit cost from the first quarter '03 to the first quarter '04.

USEC uses the average inventory cost method under which an increase or decrease in production costs, a component of our inventory cost, will have an affect on cost of sales in future periods.

For the first quarter of '04 our unit production cost increased by 7% from the first quarter of '03. This is due to an increase in labor and employee benefit costs and an increase in cost to purchase SWU under the Russian contract.

The increase in labor and employee benefits reflects the abnormally low cost during the same period in 2003, due to the previously mentioned strike, the benefit of which went into our inventory cost in '03 and is now reflected in the lower inventory unit cost.

The purchase cost for SWU increased 2% under our market based formula with TENEX, the Russian government's executive agent which reflects higher SWU market prices since 2001.

Gross margin for the period was 8.7%, compared to a 10.7% the year before. This reduction is a function of the lower average SWU prices billed to our customers.

Because government contract work generally has lower margins, these low margins had an effect of reducing USEC's gross margin by 1.3%. We are reaffirming our full year guidance that the gross margin for 2003 will be approximately 11%.

Recorded below the gross profit line on the income statement are the expenses for the American Centrifuge and selling, general and administrative expenses. First, expenses related to the American Centrifuge during the first quarter of 2004, were about the same as in the first quarter of 2003. In addition to these expenses, beginning this year, we began to capitalize American Centrifuge costs that are related to the commercial uranium enrichment plant. These costs are accumulated on the balance sheet as construction work in progress under property, plant and equipment. In this first quarter we capitalized $2.7m in centrifuge costs.

Nick mentioned our continuing commitment to the American Centrifuge demonstration and that is reflected in our spending level. In 2004 we expect to spend $70m on the American Centrifuge, with approximately $20m of that capitalized. The remaining $50m in demonstration costs will be charged to expense and will have the affect of reducing after tax income by about $30m.

Selling, general and administrative expenses, or SG & A were up $1.6m, compared to the first quarter of '03. Contributing to the increase were compensation and employee benefit costs, insurance costs and local taxes and fees. The senior management of USEC is dedicated to controlling all costs, and as a team we will be focused on this throughout 2004 and beyond.

Turning next to cash. Cash flow from operating activities in the quarter was negative by $92m, compared to a negative $20m in the same period as last year. The primary differences in cash flow between the two periods were the fully accrued payment to OVEC for cost related to termination of a power contract in 2003, and the timing of payments to Russian for the Megatons to Megawatts contract. We also had an income tax payment of our 2003 results, compared to our tax credit for 2002.

As of March 31st we had a cash balance of $146m and no short term debt. We reaffirm our cash flow guidance for the year in the range of negative $110m to $130m, with a cash balance at December 31, '04 in the range of $40m to $60m. We expect to return to positive cash flow in 2005.

We will continue to update USEC's earnings and cash flow guidance when any significant events occur that could impact the previous guidance that we've given. That concludes my comments and I'd like to turn the call back to Nick.

Thanks Ellen and before we take your questions, I'd like to touch briefly on a topic of considerable importance to USEC, our corporate governance practices. This is not a new subject for us and we have a strong commitment to integrity by every employee in every facet of our business.

This week Institutional Shareholder Services or ISS released it's annual evaluation of USEC's corporate governance practices, compared with the largest corporations in America. USEC was given a 97.4% rating, or in other words the company outperformed 97.4% of the companies in the Russell 3000.

Based on comments from ISS some of the key factors that resulted in this high score were the independence of our Board of Directors, the full Board's annual election cycle, shareholder approval of management incentive plans and stock ownership guidelines for directors and officers. ISS has once again recognized the high priority that USEC has placed on corporate governance since its creation. USEC's Board demands the highest of ethics and accountability from its management team and this resonates throughout our company. Thank you for taking time out of your day today to be part of our quarterly call. And now operator, we'd like to take some questions from the audience.

The question and answer will be conducted electronically. If you would like to ask a question you may do so by pressing the star key, followed by the digit one on your touch tone telephones. If you are using a speaker phone please make sure your mute function is turned off to allow your signal to reach our equipment. Once again please press star one on your touch tone telephone if you would like to ask a question. I'll take our first question from Dave Schanzer, with Janney Montgomery Scott.

Good morning, Dave.

And it looks like he did disconnect his line.

Okay.

We'll move on to Brett Levy, with the Royal Bank of Canada.

Hey guys, as you look into '05, given this predictability of your purchasing cycles, I mean does it look as if early '05 could have the same uneven type of earnings that '04 seems to be demonstrating so far?

Brett, generally our forward projections are through '04 only, but we have seen, I believe, the largest impact we expect from the 99 contracts. We will still continue to see some impact through '04, a little bit into '05 and some into '06.

I guess more what I'm concerned about is that the quarter to quarter numbers would be varying significantly. I mean again, if this is kind of a one time hiccup that's one thing. And I guess I still want to get some sense as to whether sort of where you see '05 going. I know you guys haven't put out guidance, but do you anticipate that from a stability from quarter to quarter standpoint '05 will be better than '04?

One of the issues, again we don't give guidance first off quarter by quarter or into '05, but as I said earlier if you'll remember, the Japanese reactors - the Japanese plants were down for, you know, just coming on line through '04. We expect to see that continued improvements at the end of '04 and impacting our results positively into '05.

All right and actually that's the leads into my next question. Can you give a little bit of an update of about what's going on from a regulatory and restart standpoint in Japan right now?

Right now, as we mentioned 12 of the plants are up and running. One has been temporarily shut down just for a final inspection. And the remaining five are going through inspection right now and we expect them to be up throughout '04 into '05, but again we can't quite predict what the Japanese government will do.

And then from a cash flow standpoint, I think you've guided to year end numbers and sort of the negative cash flow impact. Is there, from a cash flow standpoint, a quarter in the next three that is likely to be sort of unusual or should we kind of steadily loadour cash flow numbers and then adjust, I guess, for a much stronger fourth quarter?

I guess what I'm saying, is the guidance you guys have given from a net income standpoint is pretty clear. Cash flow is a little less clear. Can you talk about potentialworking capital items for the balance of the year?

Cash flow will pretty much follow that of net income as our major sales are in the fourth quarter - a majority of our sales are in the fourth quarter, cash flow will follow with that as well.

All right. Thanks very much.

Sure.

And it looks like Dave Schanzer has rejoined. We'll go to him next.

Yes, good morning. Sorry, I got cut off.

Good morning, Dave.

Good morning, Dave.

Good morning. Couple of questions. First of all, as far as the prior question concerning SWU volume from Japan, had anything happened there in recent months that was different than when you originally made your forecast for net income for the year?

No.

Okay, in other words the outlook has basically been -?

That's correct. That was all considered in our outlook and in our earnings guidance for '04.

Great. Now my second question has to do with the uranium stock pile. The information given in the press release, the second bullet point, has that changed the amount - was there any difference from the amount of uranium that the government was not going to remediate? Is that different from our prior discussions?

No the program is on track and it's running according to our plans here.

Okay.

There are no surprises in that area.

Okay, good. And then the third question has to do with government services, that's the one relatively strong point of the earnings report in this quarter. They were relatively flat quarter to quarter, year over year. I was wondering if you could give us a sense of the outlook for that part of the business going forward?

All right. As we said I believe in our earnings guidance at the beginning of the year, we expect that service to remain flat basically year over year, as we continue to do things like cold standby and cleaning up the technetium that's in the uranium.

Has there been an effort to kind of expand that business?

No, we're actually looking at the business as opportunities arise relative to our plant site operations in Piketon and Paducah. It is not one that we're actively pursuing outside of our core competencies in those plants. I would point out that the revenue has risen in the government services, but it alsois a business where the profit margins are relatively low compared to our commercial business.

Yeah, that was noted in the press release. Last question having to do with the actual construction of the centrifuge. Is there a sense at this point as to how long it's going to take and when it will actually be completed?

When we're actually up and operating in it?

Yeah.

We expectthat we will, at the end of this decade, in 2008 to 2010 bring capacity on line and we'll be replacing the gaseous diffusion plant at that time. So it will be a phased-in for the last two to three years of this decade and 2011 as well.

Okay great. And then lastly, you may or may not want to comment on it, but I was wondering if you folks had any sense of whether or not the plans to compete against you have been advanced in New Mexico? There was some talk of another centrifuge being built in the Southwest.

There is a program that's being pursued by one of our European competitors, Uranko, to build a local - a plant here in the United States. I guess they have submitted the license. It is, I guess, being pursued in I guess normal commercial business the way that a foreign competitor would do that. I really am focused more on the American Centrifuge but I do see that they still continue to have the the foreign presence there in New Mexico.

What sense do you have as to when they would expect to be up and operating?

I have no idea.

Okay. Great.

You might ask somebody else on that.

Well I'll ask them.

That's the best place to go on that one.

Okay, great. Thank you.

Okay Dave.

Up next from [Imperium] Capital, Don [Ingam].

Actually this is Steve. Good morning guys,and Ellen. I was wondering if you could elaborate on the opportunity for continued underfeeding. Could you talk a little bit about the uranium markets, what they've been doing and if you're seeing any incremental opportunity in that space?

Well the uranium markets have been, I guess what you might call unstable. That is that aside from the enrichment market, which is stable, the uranium market which is the national uranium, has seen considerable price fluctuations. In the past year the price of uranium hexafluoride or US6 has risen almost 75%. It has gone from about $30.75 to about $53.50.

There have been a number of external factors affecting that. There has been a lack of customer inventories that can be sold into the market place. There was a flooding at a significant mine in Canada run by Cameco that suspended operations for a while. The American converter, ConverDyn, run by Honeywell and General Atomics in Metropolis, Illinois, suspended operations for about four months. They are beginning to start up now. And so there have been a lot of factors like that that have created uncertainty in the market that have driven up the price.

We make decisions about whether to overfeed or underfeed uranium into the process, based upon a number of different factors. Our cost of uranium, your opportunity cost of selling that, the cost of electricity, the number of cells we have on line, so it's a fairly complex process that we make that determination.

We have recently been underfeeding, and that is using you know more electricity and less uranium in the operation process that produces an excess amount of uranium for us to sell than we have to deliver to the customer. That has been a good business practice to follow now based upon all those factors that I've indicated.

But at the same time I want to point out that when we sell uranium in the market place it usually is linked to an enrichment contract. Most of our business is selling enriched uranium product in that regard, where we sell both the SWU and the natural uranium in a product that's delivered. And accordingly, these are contracts that are engaged over a period of time. You know, prices are now at a significantly high level of $53.50 and we're not pouring contracts into the market here right now. But rather what you'll see is what we're selling over time, our contracts that we've engaged with with customers over a number of years.

It's the same thing. It's the reverse side, as you know in buying stocks,the dollar cost averaging. You're going to buy into the market over a period time. Well we are selling into the market over a period of time. So we are selling a few contracts at this price here today, but we're also selling at lower prices. I don't think you'd like us to sell - to hold all of our inventory and play the market on uranium. That's not our business.

You know, if the markets had gone in the opposite direction and now it's $6.00 per kgu instead of $53.00, we might have a lot of trouble. So that we want to strategically have a business perspective about selling into the market strategically with selling SWU to customers and we happen to be benefiting now as prices rise.

Would you characterize the change in the uranium markets as a structural change? I mean is there something - I've heard basically people talking about Cameco and talking about the Russian uranium supply declining to a point where there's, you know, we're very constrained on that front. And if that's the case, is underfeeding an opportunity that's perhaps underappreciated or how do you look at that?

I wouldn't put too much emphasis on underfeeding. Underfeeding is really at the margins. We still continue to sell uranium that was supplied to us at the time of privatization. I think that you asked the question on is there a structural change? You know, I remember when interest rates and the prime interest rate in about 1980 was 21%. And I remember everyone saying they'd never ever see Treasuries below 10% - just long term 30 year loans.

So things do change. Everyone said there was a structural change to the fixed income market. I'm always reluctant to say that there's a structural change to the uranium market. I see that there is a supply-demand issue here where you may see a higher platform level of uranium prices. But would I be surprised to see them come down? No. Would I be surprised to see them go significantly higher? Probably not.

But you know, we're not in the market of, you know, volume selling and trading and as a commodity broker here. We're in the business of long term contracts. We have gone away from short term contracts to long term contracts and that's where our focus of the business is. But I think that that the trend here is one where the prices have gone up in all different proportions of uranium. I think it benefits us. I think it supports our strategy over a long period of time, but I don't want to be a commodity broker here.

Right. Right. And last question, of the approximately $700m sales in Q4, what amount have you projected to come in the door in cash in the fourth quarter versus perhaps in the first quarter of '05?

We see a significant piece coming in in the fourth quarter '04, but there will be some cash slippage into early '05. But we don't -

Okay, would it be 30% - 40%?

No, not anywhere near that high.

Okay. Great, thank you very much.

And ladies and gentleman I'd like to take this opportunity to remind you that if you would like to ask a question you may do so by pressing the star key followed by the digit one. We'll go now to Tony [Silipo], with [Silipo] and Associates.

Good morning, Nick. Good morning Ellen. How are you?

I'm fine thanks, how are you?

When do we run out of these -I think you sort of answered, but I just want to make sure that I understand, of these low price contracts?

Sure, they will still continue some through '05 and a little bit into '06.

At some point what sort of margins can we expect on the SWUs whenever these low contracts run out?

Yeah Tony, generally we don't give out that type of information. But we would expect an improvement.

When is the demonstration facility that's slated to be, could be operational?

We should hopefully be beginning to get test information on the centrifuge about 2006/2007.

And in - just as you mentioned about interest rates et cetera, we factored in the potential change in interest rates when we're ready to put up this plan for $1.25 to $1.5b?

When we look at the project as a whole we did take into account our current cost of capital. So we are looking at market rates and what we anticipate they will be in the future.

Thank you.

Sure.

At this point there are no further questions in the queue. I'd like to turn the call back over to you for any additional or closing remarks.

Well I want to thank everybody for their participation this morning on the call. We value all the opportunities to hear from our investors now and in other venues and look forward to next week's annual meeting of shareholders. Thank you very much and good morning.

That does conclude today's teleconference. We do appreciate your participation and ask that you enjoy the rest of your day. You may now disconnect your lines.