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Edited Transcript of LEU earnings conference call or presentation 29-Mar-19 12:30pm GMT

Q4 2018 Centrus Energy Corp Earnings Call

BETHESDA Apr 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Centrus Energy Corp earnings conference call or presentation Friday, March 29, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan Leistikow

Centrus Energy Corp. - VP of Corporate Communications

* Daniel B. Poneman

Centrus Energy Corp. - CEO, President & Director

* Marian K. Davis

Centrus Energy Corp. - Senior VP, CFO & Treasurer

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Presentation

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Operator [1]

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Greetings, and welcome to the Centrus Energy Fourth Quarter and Full Year 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Dan Leistikow, Vice President for Corporate Communications. Thank you. You may begin.

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Dan Leistikow, Centrus Energy Corp. - VP of Corporate Communications [2]

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Good morning. Thank you for joining us. Today's call will cover the results for the fourth quarter and full year 2018 ended December 31.

Here today for the call are Dan Poneman, President and Chief Executive Officer; Marian Davis, Senior Vice President, Chief Financial Officer and Treasurer; John Dorrian, Controller and Chief Accounting Officer.

Before turning the call over to Dan Poneman, I'd like to welcome all of our callers as well as those listening to our webcast.

This conference call follows our earnings news release issued yesterday afternoon. We expect to file our annual report on Form 10-K on Monday. All of our news releases and SEC filings including our 10-K, 10-Qs and 8-Ks are available on our website. A replay of this call will also be available later this morning on the Centrus website.

I'd like to remind everyone that certain of the information 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 Centrus. Our actual results may differ materially from those in our forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in our filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q.

Finally, the forward-looking information provided today is time-sensitive and accurate only as of today, March 29, 2019, unless otherwise noted. This call is the property of Centrus Energy. Any transcription, redistribution, retransmission or rebroadcast of the call in any form without the express written consent of Centrus is strictly prohibited.

Thank you for your participation, and I will now turn the call over to Dan Poneman.

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Daniel B. Poneman, Centrus Energy Corp. - CEO, President & Director [3]

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Thank you, Dan, and thank you to everyone on the call today.

When I joined the company 4 years ago, we knew that the road ahead would not be easy. First, we would have to ride out a vastly oversupplied enrichment market with prices in free fall. Second, all of our competitors were state-owned enterprises with the political and financial backing to show for it. Achieving our goals to resume production of enriched uranium and return to profitability would takes years of hard work and require making some tough choices. We would have to get smaller before we could get bigger.

To weather these challenges and to set ourselves up to capitalize when the market ultimately recovered, we took a number of steps. We cut our overhead by 16% from its peak in 2016 and restructured and reduced our debt by 69%.

We hustled to bring in hundreds of millions of dollars in new sales. We adapted to the challenges posed during 8 years of falling price by unlocking a low cost supply for the long term and by diversifying into new business lines that lay a broader, stronger foundation to build our company.

As we continue to execute this game plan, we met all our guidance for 2018 with $193 million in total revenue, $164.4 million of separative work units and uranium revenue and a cash balance of $123.1 million at year-end.

At the same time, we've always known that there would be some difficult years, and 2018 was one of them. A greater proportion of our sales in 2018 were made under newer contracts signed when market prices had fallen substantially from earlier levels, all because of the natural evolution of our order book and because of the specific deliveries made during the year.

On the other hand, our cost of sales in 2018 was still based, in part, on legacy prices that predated the fall. That unfortunate combination will change in 2019, as I will describe in a moment. But for 2018, the result of that combination was $104 million loss.

Taking account of the difficulties of weathering the challenges of a falling market, the other part of our game plan from the beginning has been to be very careful and strategic in managing our cash to get through this period and to position the company to succeed in the long term. We finished the year still in a good position, with $123.1 million in cash, at the top end of our guidance, which ranged from $100 million to $125 million.

We expect to generate sufficient cash from operations in 2019 to pay the PIK toggle notes due in September, which had a balance of $26.7 million at December 31 and still end 2019 with a cash balance in the range of $120 million to $140 million.

We also ended the year with an order book in our LEU segment valued at $1 billion. That included a number of new sales contracts signed in 2018, as we extended our order book to 2030.

As we close the books on 2018, there are some important changes coming in 2019 that will improve our results this year and will enable us to return to profitability in 2020. Marian will go through the numbers in greater detail, but a big driver in our loss last year, as I mentioned earlier, was the decline in our average sales price.

Starting in 2019, however, we expect our cost of sales to be significantly reduced. When we signed our supply contract with TENEX in 2011, market prices were still near their all-time high, but the contract contained a price reset provision that took effect at the beginning of this year based on recent prices, which were historically low.

Because of this reset, the price we will pay in 2019 and for the duration of the contract will be more closely aligned with recent market prices. While it will take time for these savings to be fully reflected in our reported cost of sale, they will reduce our cash costs as we obtain supply and will begin to show up in our earnings toward the end of 2019 and then more prevalently in future years. Based on our current projection, we expect a return to profitability in 2020.

This is all occurring as the dramatic price declines for enrichment, we've seen since 2011, have finally halted and begun to rebound. In September, the published spot price indicator for enrichment ticked up for the first time since 2010 in -- back in November 2010. The spot indicator has now increased by 26% since August and published forecast called for continued increases.

Many utilities postponed their long-term contracting while the market was still falling, but now that prices are rising and supply is tightening, we expect to see an increase in contracting activities in the 2020s. We're actively pursuing new sales with existing and potential customers around the world.

The other major development is that in 2018, we signed a long-term supply agreement with Orano, the French Government's uranium enrichment company. We now have access to more than 6 million separative work units from Orano through 2030, which is the equivalent to more than 20 -- I'm sorry, more than 50 reactor years of nuclear fuel.

That in addition to our TENEX contract and our purchases of stranded material on the open market, has strengthened our position as the world's most diversified supplier of nuclear fuel and strengthens our ability to complete effectively as the market recovers.

We've also begun to turn the corner in our contract services segment where we secured several contracts in 2018, delivering on our plan to diversify into new lines of business. I would like to highlight our work for X-energy to design and to help license a first-of-a-kind fabrication facility for next-generation nuclear fuel that could power many of the advanced reactors under development around the world. This fuel could also be used in existing reactors that take advantage of the accident-tolerant fuels being developed by several firms right now. In either market, the X-energy TRISO fuel particle has the potential to be a preferred option for fueling the reactors of the future.

As the advanced reactor market matures in the coming years, we are well positioned to provide engineering, design and manufacturing services to the companies designing the next-generation of reactors including through the memorandum of understanding we signed with Doosan Heavy Industries in September.

In January, the U.S. Department of Energy announced its intent to deploy a cascade of AC-100M centrifuges at our facility in Piketon, Ohio. The cascade would demonstrate the technology's capability to produce high assay, low enriched uranium, which is a new form of commercial enriched uranium that will be needed to fuel many of the advanced reactors now under development. This work would dovetail with our X-energy work, providing some of the first concrete steps to deploying a U.S. fuel cycle to support the next generation of reactors. While we still need to work out a contract with the Department of Energy and nothing is guaranteed at this point, we are ready to move ahead quickly once the contract is in place.

This high assay, low enriched uranium project builds on the successful work of our centrifuge technology team at Oak Ridge, Tennessee, which last September, completed the most recent contract with Oak Ridge National Laboratory to continue development and testing on the AC100 design. The team has spent the past 3 years improving the design for reliability, cost and manufacturability, and the new Piketon cascade will demonstrate those improvements.

We are continuing our discussions with the Oak Ridge National Laboratory about a follow-on contract in Oak Ridge to ensure that the United States has a robust centrifuge testing and analysis capability in the future.

Based on our track record of performing decontamination and decommissioning services at our own facilities and at the Department of Energy site in Ohio, we were awarded a $15 million work authorization for the D&D of the K-1600 centrifuge test facility in Oak Ridge. We have been awarded additional D&D work at another facility at the Oak Ridge Reservation and are pursuing additional opportunities, where we can bring our experience and expertise to bear in solving complex engineering problems and manufacturing to state-of-the-art level of precision.

We've been awarded a number of other smaller contracts that tap into our advanced engineering design and manufacturing capabilities at our Technology and Manufacturing Center in Oak Ridge, which could serve as an entree into new areas of work and larger contracts in the future.

All of this was driven by our technology team and the capabilities we had assembled for the centrifuge program, which has a wide range of applications for advanced engineering and manufacturing in the energy, defense and other industries. So we are optimistic about the prospects for growing this part of our business in the years ahead.

And now, for more detail on the quarterly financial results, I will turn the call over to Marian.

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Marian K. Davis, Centrus Energy Corp. - Senior VP, CFO & Treasurer [4]

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Thank you, Dan, and good morning to everyone on the call. As Dan highlighted at the start, we met our annual guidance this year based on a strategy of winning new business and growing into new markets.

While the bottom line reflects the harsh realities of the transition to lower prices and the low enriched uranium market, the costs of winding down our demonstration cascade activities in Piketon and the immediate accounting of expenses for retiree benefits, we expect improved results starting in 2019 and a return to profitability at 2020, as our purchase costs decrease and our expenses for advanced technology licensing and decommissioning are substantially reduced.

For the fourth quarter of 2018, we had total revenue of $83.8 million and for the full year, we had revenue of $193 million, including a $164.4 million from our a low enriched uranium segment.

Separative work units or, as we call it SWU, sales were down 33% over 2017 and our average price billed to customers decreased by 46%, reflecting a trend of lower prices in recent years.

Our contract services segment revenue increased 24% over 2017, which reflected a $9.5 million settlement with the Department of Energy in January as well as our work with X-energy and others, slightly offset by the reduced work under the Oak Ridge National Laboratory contract.

At December 31, 2018, we had deferred revenue of $204 million, which will be recognized in future periods as inventory is delivered.

Our average cost of sales per SWU declined by 22% in 2018, but the overall cost of sales in the LEU segment increased by 15% because our sales volumes were higher including sales of uranium. We anticipate our average cost of sales per SWU to decline again in 2019 with further declines in subsequent years, primarily due to lowering price in our new supply contracts and the price reset of the TENEX contract.

This is the point that I'd like to provide additional detail on because it will affect our business results in future years. We procure LEU from multiple sources under short-term and long-term contracts and have inventories available that diversify our supply portfolio and provide flexibility to meet the needs of our customers. Recent purchases of SWU and our long-term contract with Orano reflect the decline in market prices in recent years. Prices under the Russian supply agreement with TENEX have also now been adjusted to reflect lower market prices based on a onetime market-related price reset that we agreed to when we signed a contract in 2011. The reset occurred in 2018 for purchases we make in 2019 and beyond, decreasing the unit cost per SWU for the duration of the contract.

The cost of sales per SWU reported in our financial statements are calculated by applying the average cost method to our entire inventories, including higher price purchases we made in earlier years.

Consequently, it will take some time for the lower prices to be fully reflected in our cost of sales, but we expect our future cost of sales sold per SWU to significantly decrease over time beginning in 2019.

Given the unpredictability of the market and other factors including pending U.S. Government trade proceedings, there can be no assurance that the expected improvement will be realized near term as the product is delivered and the revenue and costs are recognized.

Below the gross profit line we had a number of expenses that increased the net loss for the year, so let me give you some explanation for each.

Advanced technology, license and decommissioning costs increased $10.4 million in 2018 compared to 2017. These costs primarily reflect our effort to prepare the Piketon centrifuge facility for deleasing and to be able to terminate our NRC licenses, so that we can receive the cash collateral for our surety bonds tied to the facility. This effort is on hold pending the new high assay, low enriched Uranium project in Piketon. They also reflect costs above our contracts with the Department of Energy and X-energy that were incurred at the Oak Ridge site.

The declining stock market in 2018, the largest annual decline since 2008, also contributed to our loss. The $10.6 million charge to nonoperating components of net periodic benefit expense reflects unfavorable investment returns relative to the expected return assumption, partially offset by increases in market interest rates, changes in mortality and healthcare claim assumptions and favorable claims experience.

A positive development in 2018 was a reduction in selling, general and administrative expenses, where we recorded a decrease of 9% for 2018 from 2017, as our recent efforts to adjust the company size and footprint to match our current business began to show in our results. We will continue to evaluate future cost-savings and efficiencies and hope to report more progress in future quarters.

For the year, we recorded a net loss of $104.1 million compared to net income of $12.2 million (sic) [$12.1 million] in 2017. The variance was the result of the gross loss from lower sales prices, the unfavorable variance in the net periodic benefit and advanced technology expenses discussed earlier and a $33.1 million decrease in the gain from early extinguishment of debt that occurred in 2017.

For our 2019 guidance, we anticipate SWU and uranium revenue to be in the range of $85 million to $120 million and total revenue to be in a range of $125 million to $160 million.

Consistent with prior years, the revenue continues to be most heavily weighted to the second half of the year. We expect to generate sufficient cash flow from operations to repay the PIK toggle notes with a December 31, 2018, balance of $26.7 million that are due in September 2019. We expect to end 2019 with a cash and cash equivalent balance in a range of $120 million to $140 million.

As always, this guidance is subject to the factors described in the outlook section of our SEC filings, specifically, the annual report on Form 10-K that we will file on Monday.

Now I will turn the call back over to Dan.

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Daniel B. Poneman, Centrus Energy Corp. - CEO, President & Director [5]

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Thank you, Marian. In closing today, I would like to say a few words about the nuclear industry as a whole. Recent months have brought a renewed recognition of the challenges facing our planet and the role carbon-free energy must play in preventing the worst possible future outcomes. While significant concerns about nuclear power remain, attitudes are shifting, as the magnitude of the challenge comes with a sharper focus and citizens, governments, experts and organizations increasingly recognize the pivotal role nuclear energy can play in mitigating the worst effects of climate change.

At Centrus, we recognize the important role nuclear power has to play in forestalling the worst of these possible scenarios and in advancing America's energy security and national security interests.

We are passionate about how our technology solutions and expertise can help to meet these challenges, and we are grateful to the investors and to the stakeholders who have continued to support us.

We are determined to build value for you and believe that we have a great opportunity to fuel the future with advanced generation nuclear reactors that can provide clean and safe power for people around the world for many years yet to come.

Operator, we are happy to take any questions at this time.

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Operator [6]

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(Operator Instructions) There are no questions at this time. I would like to turn the call back over to Mr. Leistikow for any closing remarks.

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Dan Leistikow, Centrus Energy Corp. - VP of Corporate Communications [7]

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Thank you. Since there are no questions at this time, this will conclude Centrus' Fourth Quarter and Full Year 2018 Investor Call. I want to extend a thank you to our listeners. We appreciate your support and look forward to speaking with you again in the future.

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Operator [8]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.