Centrus Energy Corp (LEU) 2010 Q3 法說會逐字稿

Greetings and welcome to the USEC Incorporated third quarter conference call. All participants are on a listen only mode. A Q&A session will follow the prepared remarks. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host for today, Mr. Steven Wingfield, Director of Investor Relations, for USEC. Thank you sir, you may now begin.

Thank you for joining us for USEC's conference call regarding the third quarter of 2010 which ended September 30. With me today are John Welch, President and Chief Executive Officer, John Barpoulis, Senior Vice President, Chief Financial Officer, Phil Sewell, Senior Vice President, Bob Van Namen, Senior Vice President and Tracy Mey, Vice President and Chief Accounting Officer. Before turning over the call to John Welch, I'd like to welcome all of our callers as well as those listening to our webcast. This conference call follows our earnings release issued yesterday after the markets closed. That news release is available on many financial websites as well as our corporate website USEC.com. I want to inform all of our listeners that our news releases and SEC filings including our 10-K, 10-Qs and 8-Ks are available on our website. We expect to file our quarterly report on form 10-Q later today. 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 the call today may be considered forward-looking information involving risks and uncertainties including assumption of the future performance of USEC. Our actual results may differ materially from those of our forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those that are forward-looking statements is contained in our filings with the SEC including our annual report on form 10-K and quarterly reports on 10-Q. Finally the forward-looking information provided today is time sensitive and is accurate only as of today, November 3, 2010. This call is the property of USEC. Any redistribution, retransmission, rebroadcast of this call without the expressed written consent of USEC is strictly prohibited. Thank you for your participation and I'd like to turn the call over to John.

Good morning and thank you for joining us to discuss our third quarter results. It was a busy quarter as we worked to provide the Department of Energy with the information the Loan Guarantee Office needed to evaluate our comprehensive update submitted in late July. Clearly that work was worthwhile. The Loan Guarantee Office largely completed their initial technical review on October and provided us with a confidential draft term sheet that will serve as a framework for our discussions going forward. DOE's decision to move forward reflects the significant progress of the past year on both the technical and financial fronts.

I am pleased to report that we have begun discussions with DOE on the next steps in the process. We see this as a positive development and we pledge to do all that we can to expedite the process to a successful conclusion. We see the events of the past two weeks as an important step forward in the process of securing a $2 billion loan guarantee for construction of the American Centrifuge Plant. But I want to make it clear that we are not across the finish line. A great deal of work remains to be done before a conditional commitment can be offered by DOE and more work beyond that to meet the conditions and finalize loan documents. We must also raise additional capital beyond the $2 billion loan guarantee funding.

Nonetheless, we are very pleased to receive the term sheet from the Loan Guarantee Office and we look forward to concluding an agreement. With a loan guarantee, the ACP will help us meet the growing US energy needs and provide a long-term reliable and secure fuel source for nuclear power plants both domestically and around the world. Meeting that need will give USEC investors an opportunity to earn an appropriate return on the capital. Leveraging the value of our substantial investment in the American Centrifuge Technology has been a very key element of our plan to enhance long-term shareholder value.

Over the past year you heard us report on our progress in great addressing DOE's concerns. Since March we have been operated lead cascade of AC100 centrifuges, our production ready machine. We have more than a 500,000 machine hours under our lead cascade testing program that began in August 2007. This experience gives us confidence in the performance of the AC100 and provides extensive operating data that supports our loan guarantee application.

Over the next several months we will be installing additional machines to accumulate more machine hours for the AC100 centrifuge machines . And while we have a solid machine in the AC100, we have continued development work and value engineering at our facilities in Oak Ridge, Tennessee. Our goal is to systematically work to increase the machine's productivity and decrease its unit manufacturing costs. We announced in late May that we had signed a definitive agreement with Babcock & Wilcox and Toshiba to make a $200 million investment in USEC. This investment will be made over three phases with each of those two companies making a $100 million investment.

In early September, we closed the first phase of the that investment of $75 million. This investment supports continued investment in ACP as we continue working through the loan guarantee process. Closing on the next phase of $50 million investment is tied to receipt of a conditional commitment for a loan guarantee from the DOE along with other conditions. We believe this strategic relationship will ultimately create business opportunities for the three Companies throughout the nuclear fuel cycle. Under the agreement, each Company has a seat on our Board of Directors.

Over the next few minutes I will briefly discuss our financial results for the third quarter and our outlook for 2010. Taking a look at the bottom line for the quarter, we reported net income of $1 million compared to a net loss of $6.2 million in the third quarter of 2009. For the first nine months of 2010, we reported a net loss of $1.5 million compared to net income of $9 million for the same period of 2009. These results are consistent with our guidance for the full year earnings of approximately breakeven.

During 2010, we've engaged in a number of activities related to the American Centrifuge that were expensed. In the first nine months, we expensed $80 million in advanced technology expenses that had the effect of reducing our net income. Balance against that expense is other income of $32 million resulting from DOE's support for ACP activities during the nine month period. We expect this $45 million cost sharing program with DOE to conclude in the next few months. About $13 million of cost sharing funds remain to be used as of the end of September.

Turning to our 2010 outlook, yesterday we provided updated guidance for the year. Bottom line upfront, we continue to see net income close to breakeven. Looking at cash flow from operations, we expected the breakeven to negative by $20 million. Our view of cash flow provided by operations has improved since our second quarter call, due to timing of SWU deliveries to customers in the fourth quarter. Over the last several years, our gross profit margin has been squeezed by higher prices paid for SWU purchased from Russia and higher electric power prices. These are our largest cost components and they have combined to increase our average cost embedded in inventory.

Our initial gross profit margin guidance for 2010 was 5% to 6%. As the year has gone along, we have been able to make additional SWU sales and this summer, we purchased electricity that was less expensive than we initially expected. Taken together, these steps have enabled us to improve our gross profit margin guidance. We now expect the 2010 gross profit margin to be approximately 7% which is at the high end of the updated guidance issued in August.

In closing, let me emphasize three things. We continue to believe strongly that the American Centrifuge is our best path to deliver shareholder value. By successfully deploying its innovative technology, USEC will be well-positioned to be competitive over the long-term as a low-cost producer in a growing uranium enrichment market. Our comprehensive update to our loan guarantee application in July made a solid case for the project. We have demonstrated the technical strength of the AC100 machine over the past year, and we established a strategic investment while reducing overall project risk.

And finally, last week the DOE's Loan Guarantee Office advised us that they had largely completed their initial technical review. DOE provided USEC with a draft term sheet that provides a framework for further discussions and can lead to a conditional commitment. We hope this can be accomplished in the near term but timing is uncertain. Now I'd like to turn the call over to John Barpoulis for a report on third quarter financial

Thanks John. And good morning everyone. Starting with revenue for the third quarter, total revenue was $565 million, an increase of $15 million or 3% from the same quarter last year. SWU sales made up the majority of revenue totaling $404 million, which was down 13% over the same period last year. In the nine-month period, total revenue was $1.37 billion, a decrease of $200 million or 13%. SWU revenue in the first nine months of the revenue was down 21%. If you have followed USEC for a while, you know our revenues can swing significantly from quarter-to-quarter and in some cases year-to-year.

In the first nine-month period of 2010, the volume of SWU delivered was 24% lower than the same period of 2009. But we have updated our guidance for the year and we now expect that SWU volume for the full year 2010 will be down about 9% compared to last year. As SWU contracts signed in recent years at higher prices and with price adjusters become a larger portion of our backlog, we are seeing an increase in average prices billed to customers. So far in 2010 average prices billed to customers rose 4% compared to the same period last year.

Uranium revenue was $165 million in the first nine months of 2010 which was an increase of $14 million compared to the same period in 2009. Uranium volumes were up 33% as prices invoiced to customers were down 18%. Uranium market prices generally declined over the past 18 months but we have seen an uptick recently and the price indicators for uranium were at about $52 a pound earlier this week. Finally, revenue from the US Government Contracts segment in the nine-month period was $203 million an increase of $50 million or 33% from the same period last year.

The higher revenue reflects fee recognition on certain contracts with DOE and additional work in Ohio to prepare the site for decontamination and decommissioning. This segment also includes revenue from our subsidiary and AC International. On the cost side of the ledger, our two largest cost components continue to be electric power and the price we pay Russia to purchase SWU. We have a power contract through May 2012 with the Tennessee Valley Authority or TVA. That agreement provides for moderate annual increases to the base prices we pay plus an adjustment up or down based on TVA's cost of fuel and purchased power.

During the first nine months of 2010 our power costs, increased by $5 million compared to the same period last year. The average cost of power per megawatt hour increased 1% which includes the effect of the power contracts fuel cost adjustment. The TVA fuel cost adjustments for the nine-month period was 9% above the base contract price. We expected buy 5.5 million SWU from Russia in 2010 at a price that is 8% higher than last year. The price is set by contract and reflects market-based prices and other factors. Purchase costs to Russia declined $18 million in the first half of 2010 due to timing of deliveries early in the year.

We used the monthly moving average inventory cost method and these higher purchase and production cost components increased our cost of sales to the LEU segment. And the nine-month period the cost of sales for SWU and uranium was $1.08 billion which was $191 million or 15% less than in 2009. This change was due in large part to the 24% decrease in SWU volume delivered but the decline was offset by higher SWU unit costs. Cost of sales in the Government Contracts segment was $183 million in the first nine months of 2010, an increase of $41 million compared to the same period in 2009 reflecting costs associated with the expanded scope of shutdown activities at the Portsmouth Gaseous Diffusion Plant in Ohio.

At the end of the quarter, we (inaudible) several large production buildings that were part of the former gaseous diffusion plant in Piketon. Our employees did an outstanding job of meeting the goal of turning back those facilities to DOE and its decontamination and decommissioning contractor. We are now working with DOE and its contractor on an orderly transition of employees to the D&D contractor in January 2011. However there are a number of points of uncertainty such as the remaining scope of work that may continue with DOE. We expect to address these uncertainties over the next two months with DOE and its D&D contractor.

Gross profit was $38 million for the third quarter and $109 million in the first nine months of 2010 compared to $39 million and $159 million in the respective period last year. Looking at the nine-month period, our gross margins improved in the US Government Contracts segment but gross margins on a much larger LEU segment were down 40% due to the lower volumes and higher average cost of sales. Our gross profit margin was 6.7% for the third quarter compared to 7.1% in the same quarter of 2009. In the nine-month period, the gross profit margin was 7.9% compared to 10.1% in the same period of 2009. As John mentioned earlier, we updated our guidance on gross profit margins at 7% for the full year which is at the high end of the guidance we provided in early August. Below the gross profit line, we have expenses for advanced technology primarily related to the American Centrifuge.

While we substantially demobilized and reduced project construction and machine manufacturing activities in late 2009, we continued demonstration and development efforts to prepare the comprehensive update to our loan guarantee application this past July. This resulted in significant but comparatively lower expense. The expense relates to assembling machines and start-up activities in the lead cascade program as well as development work in our facilities in Oak Ridge.

The amount of advanced technology expense in the nine-month period primarily related to the American Centrifuge project, was about $80 million compared to $94 million in the same period of 2009. Also included in the expense was $1.7 million of work by NAC on a transportation version of the MAGNASTOR technology. As you will recall, we did not start to significantly demobilize the American Centrifuge construction activities until late in the third quarter of 2009. Therefore, the bigger difference in spending on the American Centrifuge project can be seen in capex when comparing the periods. [Spending] that was capitalized in the first nine months of 2010 was $91 million, which was $236 million less than the same period of 2009.

Selling, general, and administration expense was $43 million during the first nine months of 2010 or about $2 million lower than the same period last year. The largest factor was a reduction in spending on consultants offset by increases in salaries and employee benefits. In March, DOE and USEC agreed to a $90 million cost sharing arrangement regarding certain American Centrifuge activities. DOE has made $45 million available for project activities by taking the disposal obligation for a specific quantity of depleted uranium from USEC which released cash that had been posted by USEC for future depleted uranium disposition. Through September 30, USEC had qualifying expenses of approximately $65 million under the cautionary agreement with DOE. This resulted in a 50-50 cost sharing contribution of more than $32 million by DOE that was recognized as other income below the gross profit line.

I want to offer a word of caution when looking at the effective rate of our income tax in 2010. We expect that for the full year, net income will be basically breakeven after the impact of expenses related to the American Centrifuge project. At breakeven, small changes to net income can have a substantial impact on the effective tax rate. In addition, the tax treatment for the newly issued preferred equity shares will have the effect of increasing our effective tax rate. We have also seen several unusual items impact our tax calculation such as treatment of future Medicare Part D reimbursements, non-deductible dividends and issuance costs for the preferred equity investment by Toshiba and B&W and a Federal research credit that expired in 2009. We expect our overall effective tax rate to be roughly 70%.

Below the operating income line, we have a new item related to upfront cost and fees related to our preferred stock issuance. You will recall that the $200 million investment by Toshiba and Babcock & Wilcox is in the form of preferred shares. The first phase of that investment totaling $75 million closed on September 2. Upfront costs and fees related to the investment were $4.8 million in the third quarter. Looking at the bottom line, we reported net income for the third quarter of $1 million compared to a net loss of $6.2 million in the same quarter of 2009. Over the nine-month period, we had a net loss of $1.5 million compared to net income of $9 million in the same period last year.

Turning next to cash, we ended the third quarter with $146 million in cash on hand compared to $208 million at June 30, 2010 and $131 million at December 31, 2009. We had no borrowings under our revolving credit facility at the end of the quarter, and significantly we closed on the first phase of the investment by Toshiba and B&W on September 2. As part of that closing, we are now working to stand up our joint venture with B&W to build the AC100 machines. Cash flow provided by operations for the nine-month period was $30 million dollars compared to cash flow provided by operations of $319 million in the same period last year.

That $289 million difference was due to several factors including a significant monetization of inventory to meet higher SWU sales in 2009 and modestly building of inventory in 2010. As noted earlier, we have updated our guidance for 2010. We reiterated our earlier guidance for approximately $2 billion in revenue with about $1.5 billion of that coming from some SWU sales. Revenue from uranium sales is expected to be approximately $200 million while our estimate for revenue from US Government Contracts is approximately $275 million.

We were able to buy power this summer at market-based prices that were below our initial forecasts. We expect that will help improve gross profit margins and expect a gross profit margin of 7%. We expect ACP spending that will be expensed to total approximately $110 million over the full year. That will be partially offset by the cost sharing arrangement we reached with DOE that includes up to $45 million that you will see reflected under other income. We continue to expect selling, general, and administrative expense to come in at about $60 million.

Going to the bottom line, our guidance for net income remains at approximately breakeven. We had positive cash flow through the first half of 2010 but we expect that to be in the range of breakeven to cash used in operations of approximately $20 million. As previously noted, we have been building inventory in 2010 which is a draw in cash. We also expect capex related to ACP of about $100 million. Please note that there are a number of additional factors listed in the outlook section of the news release that could affect net income and cash flow. We also included information regarding the uncertainty around our US Government Contracts segment.

To quickly summarize, DOE took a significant step in the loan guarantee process when it provided a draft term sheet last week that provides a framework for our discussions going forward. We earned $1 million for the third quarter and reported a loss of $1.5 million for the first nine months of the year. These results reflect the one-time income tax provision adjustment for health care legislation, expenses related to the American Centrifuge project, and upfront costs and fees related to the investment by Toshiba and B&W. We continue to expect net income of breakeven for the full year while our guidance for cash flow from operations has improved from guidance provided earlier this year. Operator, we are now ready to take questions from our callers.

Thank you. Will now be conducting a Q&A session. (Operator Instructions)

From a summary standpoint, if there are no questions, I'd certainly like to thank everyone for participating on the call this morning. We're pleased to report on the recent progress we've made with DOE and I can assure you we will be intently focused on moving the process forward as quickly as possible. We appreciate your support, your interest, and your investment in USEC. Thank you and good day.

Ladies and gentlemen, thank you for your participation in today's teleconference. You may disconnect your lines at this time, and have a wonderful day.