Centrus Energy Corp (LEU) 2004 Q3 法說會逐字稿

Welcome everyone to the USEC Incorporated third 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 would like to turn the call over to Steve Wingfield. Please go ahead, sir.

Good morning. Thank you for joining us for USEC's conference call regarding the third quarter that ended September 30, 2004. This is Steve Wingfield, Director of Investor Relations for USEC. With me today to discuss our financial results are Nick Timbers, President and Chief Executive Officer; Lisa Gordon-Hagerty, Executive Vice President and Chief Operating Officer; and Ellen Wolf, Senior Vice President and Chief Financial Officer.

Before turning the call over to Nick, I want to welcome all of 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 market's close. 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 our news releases and SEC filings, including our most recent 10-K, 10-Q, and 8-K are available on our Website. A replay of this call also will 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 this call today may be considered forward-looking information that involves risks and uncertainties, including the assumption of our future performances of USEC. Our actual results may differ materially depending on a variety of factors that we have referenced in our news releases and periodic followings 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 active only as of today, November 4, 2004. This call is the property of USEC. Any redistribution, retranslation, 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 would like to turn the call over to Nick.

Thanks, Steve, and good morning to everyone and thank you for joining us for our third quarter conference call. After the market closed yesterday, we issued USEC 's results for the third quarter. Ellen will provide a detailed report on those results in a few minutes, but first let me give you a few thoughts on a variety of topics including our financial results so far in 2004.

Looking briefly at our results for the year through September 30, we recorded a net loss of $2.9 million or 3 cents per share. Revenue in the first 3 quarters was $750.8 million. As we've previously disclosed, about half of this year's total revenues is expected to be realized in the fourth quarter. At this point, our customers have confirmed their orders and our confidence in achieving our revenue targets for the year is very high. The pattern of variable revenue and earnings is consistent with the pattern we've seen over the past several years. Generally, our revenue is higher in the second and fourth quarters, that reflects our customers refueling schedules for their nuclear power plants in the low demand months during the spring and fog. Because our customers generally place orders under long-term contracts that are tied to the reactor refueling, which occur within a 12 to 24 months cycle, we believe USEC's financial results are more appropriately viewed over the longer term. Therefore, as we report quarterly earnings we consistently point out that short-term comparisons of USEC's financials are not necessarily indicative of the Company's longer term results.

We also announced yesterday that our earnings outlook for the full year of 2004 has improved to $18 to $20 million based on higher gross profit margins on our SWU and Uranium sales. Ellen will have more outlook details in her report. Regarding the American Centrifuge, last week we announced that 2 additional members have joined our American Centrifuge team. The Boeing Company and Honeywell International will support the manufacture of Centrifuge's machines for the American Centrifuge program. Both companies have extensive experience in building centrifuge machines through their involvement with DOE's original centrifuge program. During the 2-year term of the current agreements, the centrifuge components will be manufactured, tested, and assembled into full-size machines in Piketon, Ohio.

Another key member of the team is Fluor Enterprises, a subsidiary of the Fluor Corporation. Fluor will provide engineering, procurement, and construction management services for the American Centrifuge Plant. Fluor's responsibilities over the next two years will include design and detailed engineering. We are covering all major aspects of plant construction apart from the centrifuge machines. Fluor is very familiar with our project having played a major role in the original design of the Department of Energy's Centrifuge Plant at the same site in Piketon, Ohio. As you know, we will be using that existing facility, which has the equivalent of some 20 football fields under one roof for the American Centrifuge Plant. We're very excited about having these world-class organizations on our centrifuge team.

Each company brings important experience, skills, and financial stability that will help USEC as it works to deploy this advanced technology. USEC employees are refurbishing the building to prepare for the demonstration of the American Centrifuge. They're removing DOE-era centrifuge machines that have been idle since program was halted in 1985. We're conducting this refurbishment project under contract with DOE. We expect our state-of-the-art centrifuge machines will be demonstrated in the same space beginning 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.

And another matter, false equity and fixed income members of the financial community have expressed interest in the form, size, and timing of our capital financing plans for the American Centrifuge Plant. While we work to demonstrate the American Centrifuge Technology, we continue to actively evaluate various funding options both internal and external for the commercial plant. As we remain quite confident about our ability to finance the plan, it would be premature to lock-in any external financing now. And as you can imagine USEC has received plenty of overtures to assist us in developing and executing a financing program. Initially, we will be prepared to fund the demonstration phase through internally generated cash that continues at least for 2006 or for 2 years or more after that.

A great deal can change in the financial markets in the next 2 years. We want to retain the flexibility to analyze the market at that time and maximize the potential of our investment in the American Centrifuge when we seek to finalize financial arrangements. One of the goals of our American Centrifuge demonstration facility is to eliminate risks - economic, technical, regulatory risks, and thereby improved the financial environment for our investment. We're confident that the demonstration of the American Centrifuge will prove the high efficiency of our Centrifuge Technology and that the financial markets will find this to be an attractive investment. If we were to announce today exactly how we planned to finance the plant, our investors would lose the opportunity to gain from the clarity of the results we expect from the demonstration from the American Centrifuge. We would have invested our profits into the demonstration without allowing our investors, an opportunity to read the potential reward. We don't think that is the prudent course. We will announce our funding plan in a timely manner, but a time closer to when the capital is needed, and when the demonstration phase of the program has yielded results. The American Centrifuge is an investment in this Company's future. We're excited about its potential for USEC and our investors, and we remain constantly focused on delivering that potential. Now I'd like to turn the call over to Ellen for a report on the quarter's financial results.

Thank you Nick, and good morning everyone. Our financial performance for this year is developing better from we had previously forecasted. As Nick mentioned earlier, we have a high level of confidence in our fourth quarter revenue. Based on that knowledge, we have updated our full year guidance and now expect a net income in a range of 18 to $20 million. I'll be providing more detail on our updated guidance in a minute. First, however, let me discuss our results for the quarter.

Let's start with the bottom line, I've anticipated in our earlier earnings, we've recorded a net loss for the quarter and the 9 months. For the third quarter, we had a net loss of $3.4 million, and for the year to date, a slightly lower loss of $2.9 million. As noted in our guidance, half of our SWU and Uranium deliveries will come in the fourth quarter. Revenue for the third quarter was $252.2 million or 89 million less than the same quarter in 2003. For the 9-months period, revenue was $750.8 million or $280 million less than the same period in 2003. SWU volume was 29 percent lower than third quarter of '03. In the 9-months period, SWU volume is down 34 percent compared to 2003. As we have mentioned in the prior quarters, the factors behind this decline in volume were -- one, timing of reactor refueling which occur in cycles of 12 to 24 months depending on reactor design. Second, lower customer commitments as a result of competitors' aggressive pricing in the late 1990 and third, postponed refueling by Tokyo Electric whose reactors were shutdown beginning in late 2002 for special inspection; 15 of those 17 reactors have been restarted. The shutdowns reduced SWU volume for 2004, and looking forward to 2005, will continue to impact our SWU sales volume, but to a lesser extent than in 2004.

One of the many encouraging signs we've seen for USEC recently has been an increase in the average price billed to customers. During the quarter, the average SWU price billed to customers was 3 percent higher than the same quarter last year. For the year-to-date SWU prices billed to customers did decline 1 percent compared to the same period in 2003. The average price for 2004 continues to be affected by SWU deliveries in the first quarter made under the lower-priced contracts signed in the late 1990. For the full year in 2004, we expect average SWU prices billed to customers to be little change from 2003. The improvement in average prices in the second half of the year reflects the market pricing on our recent contracts and the continued roll of older lower-priced SWU contracts.

Sales of natural uranium for the quarter were $11 million lower than then third quarter of 2003. Generally speaking, when we refer to natural uranium, it is in the form of uranium hexafluoride or UF6. That's the form of uranium we use as feedstock for the enrichment process. For the year-to-date, uranium sales are at $7.6 million higher on 16 percent lower volume reflecting higher realized prices. Last year, at the end of October, the published price indicators for natural uranium as UF6 were at $38.25. Last week, the same published price indicators were at $62, a 62 percent increase. Much of our long-term inventory of natural uranium is presold. But some of these uranium contracts contain market-pricing adjustments that are reflected in the average price billed to customers. The average price we billed to customers improved 28 percent for the 9-months period compared to the same period in 2003. We are also selling the additional uranium made available as a result of underfeeding operation at our Paducah, Kentucky plant. Potentially, underfeeding allows us to optimize the economic value of 2 major inputs for enriched uranium -- natural uranium and electricity. We are feeding less uranium into the plant, which results in additional natural uranium being available to the market. This process has 2 upsides -- our customers appreciate this additional supply being made available because uranium has been in short supply, and the additional material generated through the process helps to extend our own uranium inventory.

And finally, on the revenue side, government contract work is lower in this 9-months period compared to same period last year. Revenue from US government contracts was $120.8 million or about $8 million below the same period in 2003. The major difference in the 2 periods was a $9.5 million, one-time fee paid in '03 that was earned over an 18-months period and included a pension adjustment. Government contract work does bring lower profit margin than the other segments of our business.

Turning now across to sales. The decrease in SWU volume in the first 3 quarters of '04 resulted in a corresponding decrease in cost of sales, with cost of sales decreasing 33 percent for the 9 months period, compared to the same period in 2003. In addition to lower volume, the unit cost of sales declined by 2 percent between the 9-month period, due to lower inventory unit costs. Previous initiatives that reduced production costs and purchase costs over the past 2 years contributed to the lower inventory costs. The average unit cost per SWU for both production and purchases from Russia increased by 3 percent in the 9 months period compared to same period in 2003. Unit production costs are higher in 2004 due to an increase in the cost power, labor, and employee benefit costs. Purchase costs for SWU increased under a market-based formula with Tenex, the Russian government's executive agent, which reflects higher SWU market prices since 2001. USEC uses the average inventory cost method under which an increase or decrease in production costs or purchase costs will have an effect on cost of sales in future periods. The gross profit margin for the quarter was about 14 percent compared to 12 percent a year before. This increase was due to a higher average price deal to customers for both natural uranium and SWU along with the lower cost of sale for SWU. For the 9-month period, the gross margin was 14.2 percent compared to the 11.4 percent in the same period of '03.

Although the gross margin improved in both '03 and 9 months, lower volumes of SWU and uranium sales resulted in a lower gross profit in both periods. Recorded below the gross profit line on the income statement are the expenses for the American Centrifuge project and selling, general, and administrative expenses. USEC continues to demonstrate its commitments to the American Centrifuge through our substantial investment in this technology. Our demonstration program is on track and ahead of our schedule or milestone. Expenses related to the American Centrifuge for the 9-month period were $36.4 million, almost $4 million more than last year. This investment in our future had the impact of producing net income by approximately $22 million or 27 cents per share. In comparison, in the first 9 months of 2003, USEC expensed $32.7 million, which had the effect of producing net income by about $20 million or 24 cents per share.

We still expect to spend approximately $70 million in 2004 on the American Centrifuge, but we have reassessed the allocation between the amounts being expensed and the amounts being capitalized. The projects we're spending this money on have not changed, only the allocation of how to account for their spending. We continue to take a conservative approach in allocating spendings between expense or capital and this reassessment has resulted in the expensing of spending that we initially believed would be accounted for as capital. Of the $70 million we expect to invest in American Centrifuge this year, $60 million or $10 million more than our previous guidance would be expensed. The $60 million in expense has the effect of producing net income by about $37 million or 44 cents per share. Costs directly related to the American Centrifuge Plant are being capitalized, and of the $20 million we had previously said would be capitalized, we now expect to capitalize $10 million in spending this year. These costs are accumulated on the balance sheet as construction work in progress under property, plant, and equipment.

Sales, general, and administrative expenses or SG&A totaled $15.3 million in the quarter and were virtually unchanged compared to the third quarter of 2003. For the year to date, these expenses are $2.9 million higher than the same period last year. Contributing to the increase were higher compensation and employee benefit costs, higher insurance costs, and new costs incurred to ensure compliance with Sarbanes-Oxley. By now, you've no doubt heard from other companies about the complexities involving complying with Sarbanes-Oxley. Documenting and testing or many processes to meet the requirements of SOX is very rigorous and time consuming. While, at this time, we do not anticipate any issues. The certification on Section 404 requirement by our outside auditors could be delayed and our fourth quarter earnings could be released beyond the date when we would normally report it.

Turing next to cash. Our cash flow from operating activities in the 9 months ended September 30 was negative by $197.2 million compared to a negative $52.4 million in the same period last year. The primary difference in cash flow between the 2 periods was the previously discussed reduction in SWU sales and the cost of building SWU inventory and anticipation of deliveries in the fourth quarter. SWU inventory at the end of the third quarter was about $300 million higher than at the beginning of the year. Another difference in cash flow between the 2 periods included a $33 million payment in 2004 related to the termination of a power contract.

Partially offsetting this net cash outflow was a $95 million reduction in accounts receivables. And, as of September 30, we had a cash balance of $15 million and no short-term debt. We had expected to temporarily draw on our bank facility beginning in the third quarter. The careful cash management allowed us to delay that borrowing until the fourth quarter. We expect to draw from the bank facility in November, but due to the substantial number of sales in the fourth quarter, we expect to repay any money borrowed before December 31, 2004.

In our earnings release today, we increased our annual guidance for net income in 2004 to 18 to $20 million or 21 to 24 cents per share. That is a $4 million improvement over our previous guidance of 14 to $16 million. We have also updated our guidance for cash flow from operations for the year, which we now see improving by $50 million from our earlier forecast. Our cash flow guidance is now updated from a range of a negative 95 to $105 million to a range of a negative 45 to $55 million. In addition, capital expenditure including those related to American Centrifuge will be approximately $25 million, $10 million below the previous guidance due to our reassessment on how American Centrifuge costs are allocated. We anticipate a cash balance at December 31 in a range of 115 to $125 million. We continue to expect to return to positive cash flow from operations in 2005.

In summary, the quarter's financial results came in as anticipated. We are now late in the fiscal year and we have very good visibility into our remaining revenues. That gives us a high degree of confidence to revive upward our earnings guidance to 18 to $20 million. That concludes my comments and I would now like to turn the call back over to Nick.

Thank you, Ellen. I also want to thank you, our investors for taking time out of your day to be part of our quarterly call to investors. And now, operator, we are ready to take questions, Melissa, Ellen and myself.

(OPERATOR INSTRUCTIONS). David Schanzer, Janney Montgomery Scott.

Couple of questions. One, with regard to the Russian material. Could you kind of characterize, what the shipments were like during the quarter? Whether they were in accordance with what you expect at and what the levels where, compared to the same quarter the year before?

Dave, they are right on schedule. There is no variation -- they vary slightly from year to year based upon orders that we place and delivery timing of the Russians, but everything is on schedule and according to plan. There is no variation from what we had anticipated.

Whether the quantity is what you expected?

Yes, there is no -- little variation in the quantities and is similar year over year.

My second question has to do with the new partners that you've added for the American Centrifuge - Fluor, Honeywell and Boeing, if I'm not mistaken. Is there in any of the agreements that you signed with them the potential for ownership as well?

Not at this stage, but that is a preclude that we may be announcing in the future but not in the current agreement.

Brett Levy, Jeffries & Company.

With respect to 2005, can you talk a little bit about what percentage of your business has price adjusted to reflect the higher spot market prices for 2005?

There are two elements to that, one relates to 2 contracts and then also to the uranium components. Our order contract, we find that as an element in our newer contract not as much in our older contract. We don't really disclose at this point the percentage breakout.

Can you -- I noted there has been some movement around. What is the expenses planned for 2005 on advanced technology development and any sense as to sort of how you are going to break 2005 between expense and CapEx?

Bret, thanks for the question. We've not disclosed anything at this point relating to 2005, and we'll do that probably as we've done in the past when we give our year-end press release and conference call and as to the breakout, in my view, cash is cash breakout is an accounting definition and will discuss that at that time as well.

And then the last one, I understand completely the decision to postpone any financing until there is sort of more of a product to show the potential investors, but you do have a maturity of your '06 bonds effective January '06. And have you guys started to think about ways that you might refinance those notes, given that we are starting to come upon that and obviously although you are not going to fund your project until probably later in 2006. Are you looking at that maturity and what you are thinking about in terms of options?

We are looking at that maturity; we are reviewing many potential ways to refinance that and will be bringing before our full board in December, a proposal as to how to refinance the 350 and will be then discussing with others how to go about it.

And because it has a prosperity dips you probably want to wait till closer to the maturity date to execute something?

What we want to do is what is right financially and that is what we are always measuring.

Tony Cilluffo, Cilluffo & Associates.

In this 18 to $20 million, does that include the expensing the 60 million. Is that correct?

That's correct. It includes all the expenses related to Centrifuge.

And that also includes the NAC acquisition close. Is that correct?

That's correct, but both are accounted for in those numbers and in our cash flow numbers.

Congratulations. Thanks you.

Could you give us an update on what you think your power costs are going to be for the rest of this year and this year in total?

Our power costs, as you know, are all ready generally pre-bought through our contract with TVA at a fixed price.

So, okay. But the main reason I'm discussing is what -- going forward in 2006, it looks like those contracts come off, have you done any work or, I mean, any progress as far as we contracting?

Let's step back a couple of steps so that everybody comes at the same page. In 2001, we entered into a normal 10-year contract with the Tennessee Valley Authority for the vast majority of our power requirements at Paducah; that contract had a nominal term of 10 years but effective pricing for 5 years, that pricing goes through mid 2006. And so after mid 2006, we will seek to have a new pricing agreement put into place either with TVA or in combination of other suppliers. I would say that that is a very active program that we have in place. It obviously represents a significant degree of our operating costs and we are looking at not just the existing contract, but there are maybe additional structures and opportunities that we make for together. I would point out that the existing contract covers the vast majority, but still we go into the open market and with some other suppliers who are currently right now and we have an expensive program going on now exploring how we might be able to meet our power requirements on an economic basis as active as any program we have right now.

Okay, so you anticipate that you will be able to get with power price in the market rising, you will still be able to negotiate some sort of reasonable rate?

We certainly expect to. Yes.

Tim Hasara, Kennedy Capital.

Could you tell me how the price of SWU is currently in the marketplace right now?

The SWU prices on a long-term basis are about $107 per SWU, on a short-term spot basis they are about a 110 to $111 per SWU. That is -- there really is not much of a short-term market, so I would not put a lot of credit into the short-term market. Most of the contracting done in the market today is a long-term basis and that is about 107 -- that as market indicators -- the two indices that are in the market that reflect that.

And the price of natural uranium in the marketplace?

Natural uranium, as we define it -- we use uranium hexafluoride and that is UF6 and that's at about $62 per kilogram of uranium (kgU). Natural uranium before it is converted into the UF6 format is called U308 or U308 equivalent and that is in the neighborhood of about 22 to $24 per pound; that's how that is calculated. Both UF6 and U308 have risen significantly in the past year.

What would be your outlook for the next year with respect to those prices?

All I can say is really as we see the market that this is probably a fully-priced commodity right now, and it is going to be driven by supply and demand going forward and what evolves in terms of new supplies coming into the market either through inventory or through additional production is still up in the air, but I would not see any significant decrease occurring and I think we have probably more pressure on the upside than there is on the downside.

One another question, with respect to your inventories, can you breakdown the amount of inventory related to natural uranium that you are selling in the market?

Generally, first of all, we don't sell directly into the market. Our uranium is sold in combination or as a part of our SWU contract. So they go hand in hand. So there is not a separate part that goes into the market per se, and if you look at our balance sheet, we have uranium both in the short-term inventory and then we have some in the long-term inventory which is that uranium which we are in the process of cleaning out, which was handed over to us from DOE.

(OPERATOR INSTRUCTIONS)

Following up on that question about the inventory, can you give us a sense of the billing into on the balance sheet or the inventory, how much of that is natural uranium and how many kilograms roughly that corresponds to as well as give a ballpark sense of how many kilograms of natural uranium you expect to sell in 2004?

In terms of what we expect to sell, I guess, I don't have that number handy for the rest of the year. It is in our forecast in terms of dollars. And that's about $ 210 million, they are to sell, that's in the inventory.

And how many kilograms roughly would be your --?

330 million.

330 million?

Right, dollars.

And how about in terms of kilograms?

Sir, I don't know and we'd have to get back to you. I just don't know the number.

And as it appears, we have further questions at this time, Mr. Timber. So, I would like to turn the conference back over to you for any additional or closing remarks.

Well, thank you very much. And, we appreciate your participation. It has been, I think a -- as we look to this year, it has been a good year, our prospects for the concluding the year in terms of our income looks good, our cash flow looks good. We are very pleased in the development of the Centrifuge program, and I think that we're excited by our long-term prospects and we remain dedicated to delivering shareholder value. Again, thank you for participating this morning and see you next quarter. Bye.

Thank you. This does conclude today's conference and you may disconnect at this time.