Centrus Energy Corp.
Q4 2016 Earnings Call Transcript

Published: 29 Mar 2017

[Operator:]

Greetings and welcome to the Centrus Energy Fourth Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Don Hatcher, Director of Investor Relations for Centrus Energy. Thank you. You may begin.

[Don Hatcher:]

Thank you, Melissa. Good morning and thank you for joining us. Today’s call will cover the fourth quarter and full year results for 2016 that ended December 31. Here today for the call are Dan Poneman, President and Chief Executive Officer, Steve Greene, Senior Vice President, Chief Financial Officer and Treasurer and John Dorrian, Controller and Chief Accounting Officer. Before turning the call over to Dan, I would like to welcome all 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 tomorrow. 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 will be available later this morning on the Centrus website. I would 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 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 quarterly reports on Form 10-Q. Finally, the forward-looking information provided today is time-sensitive and is accurate only as of today, March 29, 2017, unless otherwise noted. This call is the property of Centrus Energy. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Centrus is strictly prohibited. Thank you for your participation and I will now turn the call over to Dan Poneman.

[Dan Poneman:]

Thank you, Don and thank you all for joining us. 2016 was a very productive year for Centrus. I think we will look back on it as the time when we made important progress on our strategic initiatives, strengthened our financial picture and put ourselves in a position to grow and succeed in the future. Let me take you through a few of the highlights. First, we achieved and in fact exceeded our guidance for the year, ending 2016 with $311.3 million in revenues and a cash balance of $260.7 million. Second, we have significantly reduced and restructured our debt load that put the company on a stronger footing moving forward. Last summer, we repurchased some of our outstanding notes. And last month, we successfully completed an exchange offer, covering most of our remaining debt, which not only reduced the principal balance, but also extended the due date from 2019 to 2027. The combined success of these two efforts has reduced the total principal amount of our debt by $143 million, a 58% reduction compared to the end of 2015. Third, we achieved a favorable resolution with the Pension Benefit Guaranty Corporation on two outstanding issues we had with respect to our contributions for legacy pension plan. Resolving those issues has been a significant priority for us over the last couple of years. In notifying us of their decision, the PBGC cited the positive results we have achieved in reducing and restructuring our long-term debt. Fourth, we secured an extension of the contract for our important work in Oakridge, Tennessee to continue advancing our centrifuge technology to meet the long-term national security needs of the United States. While the funding level is about 20% lower than it was under the previous contract, it will allow us to continue improving the technology to retain key skills and personnel and to make sure that it is ready when the nation needs it in the future. Fifth, we have continued to book new sales and identified new sources of low cost supply in an increasingly competitive and low priced environment. While the historically low prices for both enrichment and uranium are challenging for everyone in our industry, we are uniquely positioned because we are no longer saddled with a high fixed cost of operating a production facility nor are we settled with significant capital expenditures entailed in building new capacity. That gives us the flexibility to obtain low cost supply for our customers and to add to the diversity of our supplier base. As we look forward to 2017, we are going to continue to focus on streamlining our cost structure, growing and diversifying our LEU business and finding new and innovative ways to serve our customers. As I said before, this is the long-term effort and much of it will take time before it is reflected in our bottom line, but I am confident we are headed in the right direction to grow and to succeed in the years ahead. So with that, let me turn things over to Steve Greene. Steve?

[Steve Greene:]

Thank you, Dan and good morning everyone. As we noted on the call – the last call in November, we expected to generate a large portion of our revenue for the year in the fourth quarter and our expectations were borne out. We expected pattern of customer deliveries to be similar in 2017 with more two-thirds of our revenues expected in the fourth quarter. For 2016, our total revenue was $311.3 million with $272.8 million of that coming from the LEU business. Our revenue declined compared to 2015, but a large part of that difference was difference by lower uranium sales, which were a function of particular opportunities at the time. Our Contract Services segment generated revenue of $38.5 million, which reflects the reduced scope of work for the contract with Oak Ridge National Laboratory that we signed in September. The volume of SWU sales increased 2% over 2015, while the average price billed to customers declined 5%. As legacy contracts become a smaller portion of our portfolio, we will continue to see our average prices decline. However, Vista since the prices in our supply agreements include market adjustments, we anticipate that our costs will also decrease in the years ahead, allowing us to maintain gross profit to support the business despite lower revenues. As of the end of 2016, our LEU business had 1.4 billion order book, which extends more than a decade. The reduction in the order book year-over-year reflects the termination of a contract that had provisions related to the deployment of the American Centrifuge plant. We now estimate that only 5% of the order book is still at risk due to similar contract provisions. We continued to view our order book as a stable source of cash flow and liquidity for the company with contracts extending well into the next decade. Cost of sales for the LEU segment declined $51 million or 18% for the full year. Excluding direct charges for retiree benefit costs, our average cost per SWU declined 14% for the year, reflecting declines in purchase costs in recent periods. Cost of sales for contract services declined $32.1 million or 50% year-over-year due to the reduced scope of work for the contract of Oak Ridge National Laboratory. Our gross profit totaled $45.1 million in 2016, with a gross profit margin of 14.5%, which is down slightly from 2015 due to increased retiree benefits costs, the inventory valuation adjustment and the effective contact termination fee in 2015. Advance technology licensing and decommissioning costs, which consists of American Centrifuge expenses that are outside of the company’s contracts with Oak Ridge National Lab increased $14.9 million in 2016, reflecting the commencement of D&D activities of the demonstration cascade. As of December 31, 2016, we have accrued $38.6 million on the balance sheet for anticipated D&D costs. We have recently had an external team to review our plan for the D&D and they concur with our planning and cost figures. We anticipate D&D activities occurring through the end of the year, pending final approvals from DOE and NRC with additional costs to support the NRC license and site lease after that until the license is terminated and the lease ends. The current lease period ends in June 2019. Moving to SG&A, we had an increase of $3.6 million year-over-year. Most of this is related to re-measurement of our defined benefit pension plans, for which there was a small charge this year and a credit last year as well as more overhead costs being allocated to SG&A due to the smaller Oak Ridge contract. We also saw reduced cost for recruiting and office lease expenses. We continue to implement new technologies and processes to reduce our SG&A costs. We reported a net loss of $67 million in 2016 compared to a net loss of $187.4 million in 2015. The improvement is primarily due to the impairment of excess reorganization value in 2015. For 2017, we see total revenue coming in at a range of $200 million to $225 million, with $175 million to $200 million of that generated in our LEU segment, reflecting an increase – an anticipated decline in SWU volume from 2016. We expect to end 2017 with a cash balance of $150 million to $175 million, reflecting among other things, the cash used as part of our notes exchange and the ongoing D&D work. I will now turn the call back to Dan.

[Dan Poneman:]

Thank you, Steve. Let me say in closing how proud I am of the team at Centrus and the progress that we are making in a difficult environment. We are delivering on our strategy to be the world’s most diversified supplier of nuclear fuel and a leader in fuel cycle technology. We have long-term sales and supply agreements for the next decade or more and we are committed to building on that book of business. As I reminded folks here, even when the industry faces headwinds, we have ample opportunities to expand our share of what is a multi-billion dollar global market for enriched uranium fuel. With our unique technical capabilities, long-standing customer relationships and a decade long track record of on-time deliveries, I believe we are well positioned to see the opportunity before us. So with that, we will be happy to take your questions. Thanks.

[Don Hatcher:]

I just want to thank everyone for your participation and continued support. And this will conclude our call for today.

[Operator:]

Thank you. This concludes today’s teleconference. You may disconnect your lines. Thank you and have a wonderful day.