Centrus Energy Corp Q1 FY2021 Earnings Call

Greetings and welcome to Centrus Energy's First Quarter 2021 Earnings Conference Call. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Dan Leistikow, Vice President, Corporate Communications. Thank you. You may begin.

Good morning. Thank you for joining us. Today's call will cover the results for the first quarter of 2021 ended March 31. Here today are Dan Poneman, President and Chief Executive Officer; Philip Strawbridge, Senior Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer; and 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. We expect to file our quarterly report on Form 10-Q later today. 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 would 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 quarterly reports on Form 10-Q. Finally, the forward-looking information provided today is time-sensitive and accurate only as of today, May 12, 2021, 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 expressed written consent of Centrus is strictly prohibited. Thank you for your participation. And I'll now turn the call over to Dan Poneman.

Thank you, Dan, and thank you to everyone on the call today. I am pleased to report that after returning to profitability in 2020, Centrus Energy had a strong and profitable first quarter of 2021. We saw total revenue of $55.6 million and posted a net profit of $5.1 million through the first 3 months of the year. As always, we could not have done this without the hard work and incredible talent of our employees. I am so proud of all that we have accomplished together, particularly under the unique challenges presented by COVID-19. We continue to work through the challenges presented by the pandemic and the ongoing realities of quarantine, including extensive telework, masking, and social distancing. We have been making our customer deliveries without interruption and benefit from the fact that most of our revenue comes from stable long-term contracts. We are also making tremendous progress toward completing our 3-year $115 million contract with the U.S. Department of Energy to build and deploy a cascade of our AC-100M machines. These centrifuges will demonstrate production of a next-generation nuclear fuel called high-assay low-enriched uranium or HALEU in early 2021, making it the first NRC-licensed HALEU production facility in the United States, a major milestone in the restoration of American nuclear leadership on the world stage in support of the next generation of advanced nuclear reactors. While the pandemic has had some impact on our manufacturing supply chain, we are working through those challenges and expect the project to finish on time. As you know, HALEU is an enriched uranium fuel with a higher enrichment level than the standard low-enriched uranium that powers most commercial reactors today. Because it has a higher concentration of fissile isotope uranium-235, HALEU allows for better fuel utilization, smaller fuel cores, reduced volumes of waste, and a number of other advantages for reactor economics and performance. We've talked a lot about the Department of Energy's Advanced Reactor Demonstration Program, or ARDP, over the last few months. Nine of the ten reactor designs selected under that program, including the two major demonstrations, are expected to operate on HALEU. HALEU is particularly well suited for microreactors because it allows for fuel cores that are physically smaller but can last for many years or even decades at remote locations. Some of these reactors may even be transportable. The U.S. Department of Defense, for example, has a program called Project Pele, which aims to build a prototype HALEU-fueled mobile microreactor within 3 years. The U.S. Department of Energy is also working to build a HALEU-fueled microreactor at Idaho National Laboratory within 2 years called MARVEL. The goal is to help accelerate microreactor development by giving designers a platform to test and demonstrate their technologies. While the capacity of microreactors is, as the name implies, smaller than other reactors under development, even a modest deployment of microreactors, whether for military or civilian use, could result in a large demand for HALEU. The HALEU production capacity we are building as part of the demonstration program will be modest, but we have a modular deployment model. Subject to the availability of funding or offtake agreements, we are ready to expand the capacity of the facility to meet any level of HALEU demand. As we noted in our annual shareholder letter, the International Atomic Energy Agency released an estimate at the end of last year that global nuclear power generation could increase by 8% to 39% over the next decade and could more than double by 2050. Rising demand tends to mean rising prices for fuel, which is exactly what we have been seeing over the last 3 years. Since reaching their lowest point in August of 2018, spot prices for enrichment measured in dollars per separative work unit, or SWU, have increased by over 55%. More utilities have come back into the market to secure their fuel supply for future years. Also, as we noted in our annual 10-K filing, we had particularly strong sales activity from November through the end of January with more than $100 million in new sales commitments. As of the end of the first quarter, the value of our long-term order book rose to about $989 million, a $29 million increase from the end of 2020. Now for more details on the quarterly financial results, I will turn the call over to Philip.

Thank you, Dan, and good morning to everyone. As Dan mentioned, for the first quarter of 2021, we had total revenue of $55.6 million and achieved a net profit of $5.1 million. Revenue for the LEU segment increased $7.4 million compared to the same quarter in 2020. Cost of sales for the LEU segment increased $12.1 million in the 3 months ended March 31, 2021, compared to the corresponding period in 2020, primarily due to increased volume. Excluding legacy costs and previously deferred sales, the average unit cost of sales for SWU decreased 14% in the quarter compared to last year. As we've mentioned before, we tend to see variability from quarter to quarter because of our customers in the LEU segment generally have multi-year contracts with purchase obligations that are annual, not quarterly. The customer decides what month to take their annual purchase commitment and then the quarter in which we report that revenue. Some quarters look worse because we have fewer deliveries, while others look better because we have more deliveries. Another source of variation is the fact that some contracts were signed when prices were higher than they are today, and others were signed when prices were lower. So a quarter can look better or worse depending on the price points of a particular contract that we're delivering in that quarter. Our Technical Solutions segment received increased revenue of $3.2 million in the first quarter of 2021 as compared to the same period in 2020, reflecting increased work performance of the HALEU and X-energy contracts. Cost of sales for this segment increased $6.4 million in the 3 months ended March 31, 2021, compared to the corresponding period in 2020, reflecting the increase in contract work performed. Now I'd like to talk a little bit about our SG&A costs. In the first quarter of 2021, our SG&A decreased by $300,000 compared to the same period in 2020. That was despite a $1.2 million increase in incentive compensation expense, primarily related to the remeasurement of obligations under our long-term incentive plans, which are based on the price of our stock. We were able to more than offset that increase by cutting back in other areas, including a $1.1 million reduction in consulting costs. We'll continue to look at opportunities to reduce our SG&A costs as we have over the last several years. As far as cash, we ended the quarter with a strong consolidated cash balance of $163.3 million. I'm sure that some of you may have noted that even with the net profit, we showed a net loss allocable to common shareholders of $2.2 million or $0.17 basic and diluted per common share under GAAP. That was the result of an exchange of common for preferred shares. Without giving effect to that exchange, on a non-GAAP basis, the adjusted net income per share was $0.34 basic and $0.33 on a diluted basis. Now I'm going to turn the call back over to Dan.

Thank you, Philip. As usual, let me offer a final thought about the importance of the nuclear industry moving forward. The demonstration program that we're all working so hard to complete to demonstrate production of this new HALEU fuel has been a challenge, but an exciting one for the company. And early next year in 2022, we are very much looking forward to seeing, for the first time in several years, the United States of America actually producing not only in risk training but this new form that is potentially the enabler of the entire fleet of advanced generation reactors that is now under development. So 2022 is a red-letter date for this company. But beyond that, there have been several promising developments for the industry in the last several months writ large. For example, the Biden administration's American Jobs Plan specifically mentioned advanced nuclear reactors and fuel as part of efforts to jump-start clean energy manufacturing through federal procurement. Significant efforts are also underway to sustain the existing fleet of commercial reactors, which contribute one-fifth of our nation's power but over half of our carbon-free power. Unfortunately, energy markets don't recognize the full value either of the resilience of this always-on power source or its tremendous contribution to our climate goals. So serious consideration is now being given to proposals that provide for tax credits for the nuclear industry similar to those that have supported the expansion of renewable energy sources like wind and solar for many years. We don't know yet what might come of these discussions, but it is encouraging to hear a rising support for the largest carbon-free energy source currently available. The updated country commitments to reduce global emissions will require nuclear energy to meet the growing need for reliable carbon-free electricity. We stand ready to meet these needs through the work of both of our business segments and are optimistic about the future of the nuclear industry and our role as a trusted fuel supplier. Once again, I want to thank all of you for joining the call, and more importantly, for the trust and confidence that you have put in Centrus. We look forward to continuing to build value for you, for the U.S. nuclear industry and for the country. Operator, we'd be happy to entertain any questions at this time.

Our first question comes from Rob Brown with Lake Street Capital Markets.

My question is on the environment for utility activity. You mentioned a number of new orders coming through. How is that playing out as you go through the year? And is there anything driving that or is it just sort of the timing on the reorder cycle?

Well, Rob, the question, there are a number of factors. While the market was in a secular decline, recall that basically from 2011 till August 2018, there was a lot of demand withheld from the market. When you think of it from the perspective of the fuel buyer, if the price of the SWU is at $60, you buy at $60, it doesn't look so good if you then see the price go to $50. So one dynamic is that as prices are rising, the utilities would get the deal sooner rather than later. And so that's one factor. Another factor is during that long period in which they were keeping demand off the market, what they were doing was working down inventory. So the cushion, so to speak, of them being able to stay out of the market has also gone down. So I think it's really that combination of factors, and frankly, an overall bullishness that people expect the prices may continue to rise. In an environment of rising prices in a commodity that does not spoil with age like nuclear fuel, there are incentives to get into the market and make a purchase.

Our next question comes from Richard Fels with Odeon Capital Group.

I have two questions. So on the last several calls, we've alluded to the American Jobs Plan and previously to the Energy Act of 2020, where they specifically start to outline that we should, in the U.S., start up uranium mining, which we haven't done since 2013. Can you guys enlighten us on who were the uranium miners in North America or in the U.S.? And are you talking to anyone that may be in the process of opening up uranium mining? I'm not sure who they were in the past.

Thank you for the question, Richard. To clarify, there has been no uranium enrichment since 2013 when the previous company shut down the last of the old gaseous diffusion plants in Paducah, Kentucky. Regarding mining, there are several U.S. companies like Energy Fuels, Ur-Energy, and UEC, as well as foreign entities such as Cameco that own properties in the U.S. These are the mines that may see increased production if the demand signals are favorable. There has been significant interest from both Congress and the administration in recognizing the importance of the uranium resource base for the country’s future and the energy sector. For instance, in April 2020, the Nuclear Fuel Working Group report discussed establishing a uranium reserve that would encompass not only natural uranium mining but also the subsequent conversion process. This reserve was allocated $75 million in the last budget cycle to initiate the process. People are currently anticipating the new budget release to see how funding for the uranium reserve will be addressed in the upcoming budget cycle. If the reserve is launched, we could witness the recommencement of uranium production from U.S. mines, which has significantly declined compared to historical levels.

We do have another question from Richard Fels with Odeon Capital Group.

Yes. I think I got cut off. Thank you for that explanation. Any domestic production should benefit LEU, I would think?

Well, when you say LEU, I think you're referring to the ticker, not to the commodity, right? So.

Correct.

Let me put it this way. I may not have addressed every part of your earlier question. Centrus has the only U.S. origin enrichment technology that is ready to deploy. This is significant for U.S. miners because it means that Centrus is uniquely qualified to fulfill national security missions. Most of the uranium enrichment available comes from foreign sources, and there are legal and policy restrictions on using foreign origin enrichment for national security purposes. We ultimately use enriched uranium to supply highly enriched uranium for reactors used in aircraft carriers and submarines. As a country, we need low-enriched uranium that is unobligated, meaning it comes from a U.S. technology base, which we uniquely possess for producing tritium, a continuous requirement for replenishing tritium reservoirs in our nuclear weapons. Any enriched uranium we generate must also come from domestically mined uranium converted in a U.S. facility. Therefore, when discussing low-enriched uranium or any enriched uranium used for national security purposes, it inherently increases the demand for natural uranium and U.S. conversion and enrichment. Consequently, there is a strong alignment of interest for those who want to see the United States restore its position on the world stage and regain the leadership it once held. It is encouraging to see that focus on any part of the supply chain because each component supports the others.

Our next question comes from the line of Rob Brown with Lake Street Capital Markets.

I wanted to follow up on the Tech Solutions business and specifically the DOE project. Could you remind us of the timeline for that and when the demonstration of HALEU will be produced? Additionally, what are your thoughts on the next steps for that project moving forward?

Yes, thank you, Rob. As I mentioned, the supply chain has faced significant challenges due to COVID, but we're on track and have been collaborating effectively with our regulators. All 16 machines for the demonstration cascade are operational in Piketon, Ohio. We are completing the final work on the EPC and expect to receive an NRC license that will allow us to start operations early next year, in early 2022. With continuous operation of the cascade, we anticipate a production capacity of about 1 metric ton over the course of a year. However, we currently don't have a follow-up program planned after this phase ends. To address your second question, once we demonstrate this capability and deliver a sample of 19.75% HALEU to the U.S. Department of Energy, our next step will be to expand this cascade. This expansion is crucial not only for us but for the entire fourth generation industry. As we have noted previously, nine out of the ten reactors awarded under the Advanced Reactor Demonstration Program will require HALEU fuel, and we will be the only U.S. supplier of that fuel. If there is optimism about the Advanced Reactor Demonstration Program, it's essential for us to expand quickly to meet the rising demand for this new category of reactors. This urgency is reflected in the Energy Act of 2020, which tasks the department with ensuring the availability of HALEU by 2026.

Our next question comes from Richard Fels with Odeon Capital Group.

Okay. So he keeps putting me on mute. Thank you for the color on my first question. It's very helpful. And my second question is what are the plans for the growing excess cash? How are you planning on using that, returning it to investors? Any thoughts there because it's certainly more than enough to operate the business.

Thank you, Richard. So I'll start this and then I'll ask Philip to augment. So we have, as you'd imagine, a continuous process of analysis of our cash position and the highest and best uses of those resources. It's been, frankly and obviously, a very good thing for us to have this strong cash position. The options include everything from looking for further ways to strengthen our capital structure. We have found a lot of benefit in the steps that we've taken so far, as you're well aware, to reduce our overall debt load by 60% and extend our maturities out to 2027. We had the tender offer for the preferred and other preferred transactions as well. Each one of these things has put the company in a better position. That's important because all of the things that we want to do moving forward on both the LEU side of the business and the Technical Solutions side of the business benefit from us being in a stronger financial position overall. Whether we use it for those or invest in some of these exciting new technological developments that may help generate stronger revenue streams moving forward is an analysis that we continually conduct from a management perspective. Of course, we keep our Board very much apprised and they provide the ultimate oversight for the strategic use of our cash resources. But Philip, could I turn to you for further color?

Yes. Dan, I think you said it well. Actually, as you know Richard, we've been active and certainly looking at both the preferred and debt as well as investing in the business. But you're right, I mean we've got a very strong cash position, so we want to make sure that we utilize it properly.

Thank you, operator. This will conclude our investor call for the first quarter of 2021. I want to thank all of you who called in or listened online. We look forward to speaking with you again next quarter.

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