Centrus Energy Corp (LEU) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the USEC Inc. first quarter 2005 earnings conference call. This call is being recorded. With us today is Mr. James Mellor, the Chairman and Chief Executive Officer, and Mr. Steven Wingfield, the Director of Investor Relations. Mr. Mellor will give his prepared remarks, which we'll follow by a question-and-answer session.

At this time, I'll turn the call over to Mr. Steven Wingfield. Please go ahead, sir.

Good morning. Thank you for joining us for USEC's conference call regarding its first quarter that ended March 31, 2005. This is Steve Wingfield, Director of Investor Relations for USEC.

With me today to discuss our financial results are -- Jim Mellor, Chairman and Chief Executive Officer; Lisa Gordon-Hagerty, Executive Vice President and Chief Operating Officer; Ellen Wolf, Senior Vice President and Chief Financial Officer; and Bob Van Namen, Senior Vice President.

Before turning the call over to Jim, we want to welcome all of our callers, as well as those listening to our webcast via the Internet.

This conference call follows our earning 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 our news releases and SEC filings, including our most recent 10K, 10Qs, and 8Ks 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 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 of today, April 28, 2005.

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 Jim Mellor.

Thanks, Steve, and good morning to everyone and thank you all for joining us for our conference call to discuss the first-quarter results. If it seems like only a few weeks since our last conference call, you're right. We also gave a Company and industry update last week at our annual meeting of shareholders and a copy of those remarks is on our website.

So with that in mind, I intend to keep my comments brief this morning and we'll get to the numbers and questions sooner.

We continue to make progress, demonstrating the American Centrifuge. This is our number one program. During the first 4 months of this year, we've met 2 more milestones under our agreement with the Department of Energy. First, we began testing individual centrifuge machines at Oak Ridge, Tennessee. And second, we began manufacturing components for the centrifuge machines we plan to assemble later this year as part of our Lead Cascade.

But while we're focused on the future with the centrifuge program, we still have our eye on the ball regarding our current production facility at Paducah, Kentucky. Continuing a trend we addressed in our annual report to shareholders a couple months ago, last week, we were operating a record 169 production cells. And that's the highest number in over 25 years. And that achievement took a great deal of teamwork and sweat by our folks at Paducah. They are just doing a great job there.

Next, the board has hired an executive search firm to conduct a nationwide search for a new Chief Executive Officer for USEC. They've had interviews with our board and our key executive team so they're up and running at this time. And we realistically expect that this search will take probably several more months.

Also, we reported solid financial results for the first quarter that exceeded last year's results for the same time period. And Ellen is going to cover that in depth in a few minutes.

And we've begun to see the result of our effort to reduce SG&A expense. Of particular note is that we lowered spending on outside consultants by $2 million in the first quarter. And this effort to lower our SG&A will continue.

And as you know, yesterday, President Bush gave another strong endorsement that nuclear power should be a major part of the solution to this country's energy needs. In a speech, the President noted that today's technology has made nuclear power safer, cleaner, and more efficient than ever before. Given that this country's electricity demand is expected to grow by 50 percent over the next 20 years, we applaud his initiatives to make nuclear energy an essential part of new power generation.

Federal support for the first several new reactors and protection against unwarranted licensing delays will go a long way toward bringing new nuclear plant construction that we see overseas today to the United States tomorrow. Increased reliance on clean nuclear power only supports the nuclear power industry's need for our proposed American Centrifuge facility.

So in wrapping up my remarks this morning, let me just say that all this is good news for both the U.S. economy and for USEC as we move forward to demonstrate and deploy the American Centrifuge program, which we expect to be the most efficient uranium enrichment facility in the world. This continues to be our number one priority here.

Now with that, I'd like to ask Ellen to report on the financial results of the first quarter and I'll be available later during the question-and-answer period. So Ellen?

Thank you very much, Jim, and good morning, everyone.

Before talking about our quarterly results, again, I'd like to remind you that, as we have said in the past, we believe USEC's financial results are more appropriately reviewed over the longer term. Our customers generally place orders under long-term contracts that are tied to their reactor refueling, which occur within a 12- to 24-month cycle.

In fact, during the first quarter of this year, a large customer order that we had expected in the second quarter was delivered by USEC in this first quarter. Therefore, as we report quarterly earnings, we point out that short-term comparisons of USEC's financials are not necessarily indicative of the Company's longer-term results.

Now, let me start with the bottom line. Our financial performance in the first quarter was solid. We earned a profit of $900,000 versus a loss of $9.8 million in the first quarter of 2004. Driving this change in net income was our growth in revenue quarter-over-quarter. Revenue for the first quarter was $311 million, $101 million more than in the first quarter of 2004.

SWU revenue for the quarter totaled $214 million, an improvement of $62 million, or 41 percent, over the same period last year. Both pricing and volume in 2005 for SWU was better than it had been in 2004.

To put our results into perspective, I'd like to point out that not only was last year's first quarter a low watermark for the average price billed to customer, we also had a very low sales volume. This year, we are continuing to see a trend that started in mid 2004, of an increase in the average price billed to customers.

During the first quarter of 2005, the average SWU price billed to customers was 6 percent higher than the same quarter in 2004. For the full year, however, average SWU prices billed to customers are expected to be only modestly higher than they had been for the full year 2004.

Uranium revenue for 2005 increased $26 million over the first quarter of last year, reflecting a 91 percent increase in volume and a 23 percent increase in average realized prices. This increase in uranium sales is tied to the increase in SWU sales and also sales from underfeeding. Uranium sales are generally connected to enrichment contracts and our SWU deliveries were up 33 percent this quarter over the first quarter of last year.

Revenue from U.S. government contracts and other totaled $51 million for the quarter, or an increase of $12 million. This increase includes, for the first time, $5.1 million of revenue from NAC. This is the first full quarter we have included NAC in our results since our acquisition in November of 2004.

Turning next to cost of sales. The 33 percent rise in SWU volume in 2005 resulted in a corresponding increase in cost of sales. The unit cost of sales increased by 1 percent between the 2 years.

USEC uses the average inventory cost method, under which an increase or decrease in production costs or purchase costs has an effect on cost of sales in future periods. Therefore, the increase in unit cost of sales in this quarter reflects increases in both purchase and production costs that we had reported on in earlier periods.

In the first quarter of 2005, the unit cost of purchases and productions decreased by 1 percent over 2004. Our purchase costs of Russian material were higher, as determined by our market-based pricing formula that reflects higher market prices that have occurred since 2001. On the production side, our total cost for electricity, labor, and benefits did increase. However, we produced 9 percent more SWU at Paducah, resulting in a lower per-SWU cost of production that offset the slight increase in purchase costs.

The gross profit in the first quarter was $48 million, an increase of $30 million, or 168 percent, over the same quarter of 2004. The gross profit margin for the quarter was 15.3 percent, compared to 8.5 percent in the same quarter last year. This increase was due to a higher volume of SWU and uranium sold and a higher average price billed to our customers. We anticipate a gross margin for the full year to be in the range of 12 to 14 percent.

Now, below the gross profit line are the expenses for the American Centrifuge project and selling, general, and administrative expenses.

As Jim mentioned, USEC continues to make a substantial investment in the American Centrifuge technology. Total spending related to the American Centrifuge for the first quarter was $26 million, of which about $4 million was capitalized and $22 million were expensed. This investment in our future had the effect of reducing net income by approximately $14 million, or 16 cents per share. In comparison, in the first quarter of 2004, USEC had expensed $9.4 million on advanced technology, which had the effect of reducing net income by about $6 million, or 7 cents a share.

The higher level of spending between the 2 quarters reflects additional staff, increased spending on manufacturing centrifuge components for the Lead Cascade, the cost of refurbishing systems that will support the Lead Cascade and commercial plant design and licensing activities.

Selling, general, and administrative expenses, or SG&A, totaled $15.2 million for the quarter, compared to $16 million in the first quarter of last year. This year's SG&A total does include $1.3 million of expense by NAC, which had not yet been acquired in the first quarter of 2004. Therefore, when we adjust for NAC, our SG&A would have been $2 million less in the first quarter, with almost all of that coming through a reduction in our consulting expenses.

Now turning to cash. Our cash inflow from operating activities for the first quarter was $81 million, compared to an outflow of $77 million in the first quarter of 2004. The primary difference in cash flow between the 2 periods was substantially higher revenue in 2005, while in 2004, there was a temporary buildup in our inventory of about $150 million and a onetime $33 million payment related to the termination of a power contract.

Then finally, turning to the balance sheet. Our cash balance at March 31, 2005 was $242 million.

Just below the cash line, we do have a new line called restricted cash and I'd like to explain what that is. In 2004, USEC entered into an agreement with the Department of Energy to process and clean uranium that belongs to DOE that is tainted with technetium, or what you'll often hear us refer to as tech-99. DOE provided USEC with 905 metric tons of in-spec uranium February that the Company will sell to fund this project. We have begun selling this uranium and the proceeds pay USEC's expenses for cleaning the tainted uranium. Any excess proceeds are recorded as restricted cash. Under the agreement, if proceeds from these sales exceed the cost of cleaning the tainted uranium, the excess cash will then be returned to the Department of Energy.

You may have also noticed that $325 million in USEC's senior notes have moved up to current liabilities. We made that change because these notes are now due in less than 12 months. We are in active discussions with financial institutions to refinance those senior notes prior to their January 2006 maturity date.

We are also in active discussions to replace our revolving credit facility prior to its September 25, 2005 expiration date.

In summary, the financial and operating results for the first quarter were solid. Revenue, gross profit margins, net income, and cash flow from operations all improved substantially over the first quarter of 2004. We also saw movement of an anticipated customer order into the first quarter that may affect second-quarter results, but will have no impact on our anticipated annual results.

And while we're on the topic of our annual results, I want to point out that we are reaffirming our previous guidance for earnings for 2005 of 25 to $30 million, or $0.29 to $0.35 per share on total expected revenue of approximately $1.5 billion. This reiterates the 2005 guidance provided in the outlook section of our 10K, which is available on our website.

That concludes our report on USEC's quarterly financial results. Operator, we're now ready to take questions.

Thank you. [OPERATOR INSTRUCTIONS]

Brett Levy, Jefferies & Company.

I guess the first question is, can you talk a little bit about the CEO search and kind of where you guys are in that process and maybe some sense as to when you may get concluded?

Well, as I mentioned in my formal remarks, the process is underway. We have selected a search firm. It is Korn/Ferry. They have gone through the process of interviewing our board members, our key executives here at headquarters, and they're on their way. And as I indicated, I think the process will probably, realistically, take between 4 and 6 months.

All right. And then I really only had another question. On the refinancing, you guys had previously said that the cost of refinancing the existing debt, the 6 5/8 would be similar to the current cost. Clearly, where interest rates have gone and truly where credit spreads have gone, my sense is, is that that's maybe a tougher statement to make now. And just, I wanted to know kind of what you were hearing on that front.

The other thing is with 242 in cash right now, are you able to repurchase any debt under your current bank agreement or to do anything else to kind of open market repurchase parts of your capital structure?

We have the -- let me start with the second part. We have the ability to repurchase some debt under our facility and, for the appropriate price and timing, we will do so.

Second, on market conditions, as we mentioned in the 10K and I've mentioned previously, at the time, we felt there would not be a substantial increase in our current costs, but it really, as you said, depends on market conditions and the timing. And we'll continue to watch that as the market goes up and down on a daily basis.

All right. Thanks very much, guys.

Thank you.

David Schanzer, Janney Montgomery.

Yeah, good morning.

Good morning.

Good morning, Dave.

I have several questions. First of all, could you give us a quantification of, in terms of earning per share, not necessarily just of that one large customer, but the movement of orders that you expected in the second quarter that were realized in the first quarter? What was the earnings-per-share impact of that? Not just the one customer, but any orders.

Yeah. Dave, while I appreciate the question, we don't give quarterly guidance and we don't talk about a particular quantity of a customer's order. However, I would like to reiterate that we are not moving off of our yearly guidance for 2005.

Okay.

It's just a shifting between the quarters.

Understood. My second question is, of your current uranium stockpile, how much of it -- what percentage of it needs to be brought up to standards, to be used?

There's about 20 percent of what was given to us by the Department of Energy that we still need to clean. And it is -- and that, again, we list as a long-term asset. And there's a small piece of that long-term asset that does not need to be brought up to speed, up to spec.

Okay. Ahead of the implementation of the American Centrifuge, could you give us some idea or color of what's being done with regard to electricity contracts for Paducah before the Centrifuge actually takes over?

As you know, the contract that we have runs through mid 2006. And, at the appropriate time, we will negotiate and come up with a new contract to carry us from mid '06 through the end of production at Paducah.

There's been no intent on your part to try and resolve that sooner?

We will resolve it at the appropriate price sometime between now and June '06.

All right. Has there been any movement with regard to trying to obtain ownership or partnership for the American Centrifuge?

No. Partnerships in terms of bringing in a partner?

Right.

Yes.

For percentage ownership or--?

Yeah. No. We'll continue to look at the appropriate financing partnership, maybe one source of that financing, but so are others, such as internal cash, debt, or some form of equity or partnership. So all of those are potential and we continue to look at those and we'll want to wait until a little bit further along in meeting our milestones before we pursue those.

Okay. You talked a little bit about government contracts becoming somewhat more important. Could you give us any color or idea of what kind of percentage of either EBITDA or net you would expect that to be in the next several years?

There are 2 kinds of government contacts that we have, Dave. First off, those that relate to NAC and the work that they are doing. And that is new to our revenue line and we would anticipate that that will continue to grow.

And then the second are some of the government work we are doing in preparation for American Centrifuge and also for the tech-99 cleanup. All of that is not high profit margin and it's more reimbursement of costs. And we expect to continue with that through the cleanup of all of the tech-99 and through the cleanup of the facilities to enable us to put in the Centrifuge.

I was referring actually more to the NAC contracts. I was wondering if you had any numbers that you could share with us with regard to the kind of growth rate or a percentage of net going forward that--

As I said in prior calls and on the prior press release, when we announced the acquisition of NAC, we felt it would add about 1 million or so to the bottom line and produce about $30 million of revenue in 2005.

And you don't see that as being materially different going forward?

I see it as continuing to grow, but we don't give projections past 1 year.

Okay. And then lastly, could you give us an idea of what the percentage increase was in the cost of the Russian material?

That, again, I apologize, Dave, is confidential information.

Okay.

Okay.

Thank you.

Thank you.

Paul Clegg, Natexis.

Hi, good morning.

Morning.

You guys have a big position in Japan. Despite their economic situation, they still seem to be planning a big nuclear expansion there longer term. You've got good market share, it seems you got good traction. I don't hear you talk about it a lot. Could we have a little update on the competitive dynamics there and how you see the market developing there going forward?

Sure. This is Bob Van Namen. Japan continues to be one of our most important markets. The Japanese are heavily pro-nuclear, continuing to rely on nuclear power to meet the Kyoto goals, plus their own internal energy, security needs. So that is absolutely one of our most important markets.

Their economy has been in the slow down, but we do see it starting to pick back up again. As it does so, they are bringing online new reactors and we see that continuing in the future. So that is clearly one of our future markets as well.

Are you seeing any more competitive pressures there from other parties?

It is a world market that we're operating in. We see the same dynamics that we see in other markets. Japan, yes, we do see competition there, just as we do in the U.S.

And if I may, a follow-up on power costs, kind of following up on David's question. If I'm doing the math right, obviously, your market power costs are a lot higher than what you've got on the TVA contract. I know you can't give us a specific number, but would it be possible to just sort of guide us in the direction? Should we be looking for a large increase or a nominal change when you renegotiate that contract? Any guidance you could give on that would be helpful.

And then finally, I don't know if you want to comment on this or not, but obviously, there was a speech done in San Antonio recently where -- excuse me -- a speaker kind of took aim at the economics of American Centrifuge. I'd love to hear your comments on that, if you can just address his basic claims and maybe talk about where you believe he's wrong or where the logic breaks down.

Okay. First, quickly on the power contract, at this point in time, I am not going to -- I'm not able to really comment on where we expect the price to go. It is for negotiations with TVA and discussion with TVA. And we are optimistic we will reach a solution on power that is good for all of us.

Okay.

On the San Antonio meeting, since Bob was there personally and heard the speech, I guess I will ask Bob to comment.

Yes. I not only heard the speech, I did also take issue with a number of the comments that the speaker made regarding the American Centrifuge and a number of other issues related to USEC.

Many of the arguments and claims that he brought out – and this is the gentleman who's been predicting USEC's demise within 2 months for quite a while and has proven to be false over time, were old arguments and really without a whole lot of basis and I think he distorted many of the facts surrounding our business.

So rather than going through each individual one, I'd just say that I think there was a bias there and I think the people in the audience recognized that he was not speaking from a strong factual basis.

Okay. Thanks.

Okay.

[OPERATOR INSTRUCTIONS]

David Snow, Energy Equities.

How much of the uranium inventory from the DOE have you sold so far?

We have contracts for almost all of that uranium at this point in time. And if you will share some patience with us when you review our 10Q, there will be more information on it.

Contracts to sell it on a long-term basis or something like that?

Most of it within this year.

Oh, okay. Thank you.

[OPERATOR INSTRUCTIONS]

Stephen Pineault, Imperium Capital.

Good morning, gentlemen, and Ellen. Quick question on the -- or actually, a follow-up to the last question. On the national uranium that's in your inventory, what percentage of that has been sold forward and do you have -- is there any way you can give us some color on the pricing?

Most of our uranium is sold with our SWU. They are packaged deals, so to speak. And, again, we expect that uranium will disclosed in the Q, to last through '07.

Okay. But no color on pricing?

No. Some of the pricing, as I said before, was fixed at the time of the contract with some market upside. Usually, it's capped. And others will go full market price. It is a combination of both.

Okay. Thank you.

And at this time, there are no further questions. I'll turn it back over to your host for closing remarks.

Okay. This is Jim Mellor and I just want to say -- thank all of you for your participation in this morning's call.

We really value each of these calls as an opportunity to hear from you, our investors. And let me just tell you that we're excited about USEC's long-term prospects. We remain dedicated to delivering shareholder value and look forward to speaking with you again in early August with our second-quarter results. Thank you all very much.

That does conclude today's program. We thank you for your participation. Have a good day.