Centrus Energy Corp Q2 FY2023 Earnings Call

Greetings, and welcome to Centrus Energy's Second Quarter 2023 Earnings Call. Please note that this conference is being recorded. I am now pleased to introduce your host, Dan Leistikow, Vice President of Corporate Communications.

Good morning. Thanks for joining us. Today's call will cover the results for the second quarter of 2023 ended June 30. Today, we have Dan Poneman, President and Chief Executive Officer; Philip Strawbridge, Chief Financial Officer; and Kevin Harrill, 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 report for the second quarter of 2023 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'd like to remind everyone that certain information we may discuss on this call 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, August 4, 2023, 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. Thanks for your participation. I'll now turn the call over to Dan Poneman.

Thank you, Dan. And thank you to everyone on the call today. This was another strong, productive, and profitable quarter for Centrus, booking $12.7 million in net income and $98.4 million in revenue. This includes $39.5 million in uranium sales driven by the continued rise in natural uranium prices as global supply remains constrained. So far this year, we've delivered $146.4 million worth of enrichment and natural uranium in our LEU segment, while continuing to refill our pipeline with new orders, thus maintaining the value of our order book at $1 billion through 2030. We are building momentum in pioneering the HALEU market and delivering a secure, reliable domestic source that will meet the needs of industry as well as the U.S. government. After completing construction of our demonstration cascade of centrifuges, as well as our operational readiness reviews in June, we secured final approval from the Nuclear Regulatory Commission to begin receiving uranium at our site and loading it into the cascade. We are now finishing some final testing activities and expect to begin production and meet our contractual obligation to make 20 kilograms of high-assay, low-enriched uranium or HALEU by the end of this year. This will be the first U.S.-owned, U.S. technology enrichment plant to begin production in 70 years. What a fitting way to commemorate the 70th anniversary of President Eisenhower's speech before the United Nations, which set the United States on the path towards global leadership and the responsible deployment of nuclear energy for the benefit of humanity, a path that the Piketon plant can help restore. Once we complete production of the first 20 kilograms of HALEU, we will progress to Phase 2 of our contract, a full year of production at the annual rate of 900 kilograms of HALEU per year. While Phase 1 of the contract requires a 50-50 cost share, starting in Phase II, the Department of Energy will pay the full cost of production plus an incentive fee in exchange for the output of the cascade. So the U.S. government will become our first customer. Indeed, it is our hope and expectation that this will be the first of many customers for this powerful fuel, three tablespoons of which could support one person's electricity needs for life, all while emitting no carbon. Subject to the availability of appropriation, the contract also gives the department the option to purchase up to nine additional production years from the cascade. While the output of the demonstration cascade will be modest, it is urgently needed. The Department of Energy has made a multibillion-dollar commitment to nine different HALEU fuel reactor designs and critically needs the HALEU to support reactor demonstrations and fuel qualification for those reactors. The overall need for HALEU, even for just the first round of demonstration reactors, significantly exceeds what we can produce from the demonstration cascade. So, a great deal more capacity will be needed and soon. In June, the Department of Energy issued a draft request for proposals outlining a program to purchase up to 145,000 kilograms of HALEU over a ten-year period. Fully implementing this program would require significantly more money than Congress has thus far appropriated, but the Inflation Reduction Act signed last year included an important $700 million down payment on that effort. We look forward to applying whenever that RFP is issued, and we believe that we have a compelling case to make since we have the only site in the United States licensed for HALEU production and can expand HALEU production quickly. A commercial scale cascade with 120 centrifuges can produce about 6 metric tons per year. We can place the first one online within 42 months of securing funding and can deploy an additional HALEU cascade every 6 months after that. We have not seen any faster timetable in the industry, and speed is a crucial factor here since reactor developers need significant quantities of HALEU in the next few years. We have consistently said that establishing a domestic HALEU supply chain will require a public-private partnership, and we are doing our part. Just last month, we took an important step towards securing additional private sector support for a potential expansion of HALEU production. As many of you know, on July 17, Centrus and TerraPower, a leading nuclear innovation company founded by Bill Gates, announced that we have signed an MOU to accelerate joint efforts to create domestic commercial scale HALEU production. With support from the Department of Energy, TerraPower is building a commercial scale Natrium reactor in Kemmerer, Wyoming. Under this MOU, our two companies are evaluating how to expand our capacity in Piketon so that we can deliver HALEU in the quantities and on the timeline necessary to support the 2023 operation date for the Natrium reactor. With that, let me turn things over to Philip who will go into more detail about our numbers for the quarter.

Thank you, Dan. Good morning, everyone. As discussed before, we've experienced variability in our quarterly results due to when clients take their deliveries. Last year, for example, we had a gross profit in all four quarters, but more than 90% of that came in the second and fourth quarters. The vast majority of our LEU contracts are multiyear contracts. Our customers have a purchase obligation on an annual basis, not a quarterly basis. They choose which quarter to take delivery, and we book the revenue and cost of sales in that quarter, which often varies from year to year. What matters for us is that our annual performance, not quarterly performance, is good. That said, we had a strong second quarter. Our total revenue was $98.4 million, in line with the $99.1 million we generated in the same quarter last year. In the LEU segment, we generated $87.6 million in second quarter revenue against the cost of sales of $60.8 million, earning a gross profit of $26.8 million for the segment. As mentioned before, the specific contract and pricing mix of SWU contracts and the timing of customer deliveries change from quarter to quarter. This, along with an increase in uranium sales, impacted our margin for that quarter. In our Centrus Technical Solutions segment, which includes our contract with the Department of Energy to build and demonstrate HALEU production as well as a variety of other contract work for public and private sector customers, we generated $10.8 million in revenue against cost of sales of $9.6 million for the quarter, resulting in a gross profit of $1.2 million for that segment. We have also been making good progress towards strengthening our balance sheet so that we will be well positioned to make investments in our future, expanding our cash balance to $245 million, which includes $32.5 million of restricted cash for financial assurance. Our cash and cash equivalents balance has increased by $23.7 million since last quarter and $32.6 million since the end of last year. As Dan mentioned, as of June 30, our LEU order book is valued at approximately $1 billion through the end of the decade. And remember, the $1 billion is just for the LEU segment of our business. It does not include our work on HALEU or other contracts that we have in our Technical Solutions segment. With that, I'll turn it back over to Dan.

Thank you, Philip. This year, 2023, is a pivotal year. There is now widespread agreement that restoring a domestic uranium enrichment capability is essential for America's national interests, national security, energy security, climate goals, clean energy requirements, supply chain resilience, the health of the American economy, and generating good family-supporting jobs. This understanding was already evident last year when Congress allocated $700 million in the Inflation Reduction Act as a starting point for establishing a domestic HALEU supply chain. At that time, it was widely acknowledged that further federal investments would be necessary, and that momentum has continued into this year, despite claims that consensus in Washington is elusive. The pressing need to restore America's domestic uranium enrichment capability has emerged as a significant area of bipartisan agreement. In recent weeks, both Republicans and Democrats in the House and Senate have put forward proposals for a substantial federal investment to rebuild America's nuclear fuel supply chain, including both low enriched uranium and HALEU. New appropriations for enrichment have advanced through committee in both Congressional chambers. The Senate Energy and Water Appropriations bill includes $800 million, while the House version proposes $2.4 billion. There is still much work to be done to pass, reconcile, and send these bills to the President. However, this represents the strongest bipartisan support for an investment in America's enrichment capacity in decades. Additionally, in late July, the Senate endorsed an amendment from Senators Barrasso, Manchin, and Rich to the National Defense Authorization Act, which authorizes the Secretary of Energy to accelerate the construction of new domestic enrichment by purchasing significant amounts of low-enriched uranium and HALEU. Since the NDAA is critical legislation, it's common to see many amendments proposed, but only a few succeed. This year, over 900 amendments were introduced, and the amendment authorizing investment in uranium enrichment was among just 8 that were adopted through individual votes, passing by an overwhelming 96 to 3. This historic vote aligns with the legacy of President Eisenhower's Atoms for Peace initiative and could be transformative for our industry. I am extremely thankful to the members of the House and Senate from both parties who have united to tackle these urgent energy and national security challenges. The time to restore America's domestic uranium enrichment capacity is now, and we are committed to contributing to this effort. I also want to express my gratitude to all our investors who have steadfastly supported us in this vital work. On a personal note, I want to acknowledge our exceptional CFO and Senior Vice President, Philip Strawbridge, who has chosen to retire on December 31 after nearly four years of remarkable service at Centrus. This is a bittersweet moment for us; while we celebrate Philip's significant contributions to the mission of this company and our shareholders, we will truly miss his leadership and sound advice. Fortunately, we have found a worthy successor in Kevin Harrill, who, as Chief Accounting Officer for the past two years, has excelled in both substantive matters and in ensuring an accurate and efficient reporting process that our shareholders value with each quarterly and annual earnings report. Kevin will assume the CFO role effective September 1, with Philip transitioning to an advisory role to assist me and the Board of Directors until his retirement in December to ensure a seamless handover. Everyone at Centrus shares my heartfelt gratitude for Philip and wishes him enjoyment and success as he embarks on his next chapter. Now, we will take your questions.

The first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Just wanted to clarify on the DOE draft proposal. What's the sort of timeline on getting the next steps there, and what do you see at this point? And then in general, what's sort of the kind of methodology that the DOE is starting to coalesce around in terms of the support of these commitments to buy materials? Or are they capital commitments upfront? How is it sort of shaking out at this point?

Rob, that's a great question. However, I want to clarify that I no longer speak on behalf of the U.S. government. Regarding the timeline, everyone knows the requirements in the Energy Act of 2020 for having HALEU ready for advanced reactors, which are expected to start operations later this year. The focus is on 2026 and 2027. As for the actual process, the draft RFP was issued around June 6, and we submitted our comments by July 6. It usually takes some time to review these comments, and I understand many robust comments were provided. The program structure appears to be uncertain. The RFP outlines several considerations regarding the responsibilities of the contractor, such as whether the department will purchase the final product or just the separate work component, focusing on HALEU rather than LEU. There are multiple issues under review, and we are eager to see the outcome, but I cannot predict when the department will make a decision since that ultimately depends on them.

And I understand it's hard to predict the sort of government steps. But on the current contract you have Phase 2, where are you at in terms of capacity to fulfill that 900 kilograms per year? Can you do that with what you've got? Or do you need to add capacity there?

No, we can do that. The way it breaks down, basically, this first phase, Phase I, this very modest 20-kilogram production, that's basically to show that it works, right? And of course, the significant thing about that is the only portion of this contract that is cost-shared. So once we're past Phase I and into Phase II, the 16 machines are indeed sufficient, Rob, to produce the 900 kg that are pledged under that contract. Then those will operate, and they can produce that quantum in that amount of time. Obviously, as I said in my remarks, our ambition is to make a lot more. And for that, we will, in fact, need to expand. It is our hope that we're going to do that and to put these additional tranches that come out in chunks of like 120 machines each, and each one of those cascades can, in turn, produce 6 metric tons a year. Therefore, within 42 months, if you add a ton effectively into 900 kilograms, you've got a ton plus 6 tons, that would be 7 tons, and then we put another cascade on with another 120 machines and reached 6 months thereafter. So, within 48 months, just on the new build, we could have effectively 12 metric tons of capacity production.

Thank you. Next question comes from the line of Joseph Reagor with the ROTH MKM.

Dan and Phil and team, I have a question on how you guys are handling filling out the order book and like the out years. With the possibility that the U.S. government, some facet eventually bans the purchase of enriched uranium out of Russia, how do you, and the utilities, I guess, look at longer-term contract signing? Is there a finite time you're sticking within? Are you guys signing beyond that, but with a caveat that if something happens there, the contract is avoided? Like what do you guys do there?

Well, Joe, of course, I can't get into specific contract terms on the one hand. On the other hand, the first thing that must be said is there is universal recognition that given that Russia accounts for 46% of the world's installed base, it is an urgent priority to build new capacity. So, the first thing people are doing is looking at how to get more capacity. That's why this whole legislative effort is so important and so intense, frankly. Everyone also recognizes that it will take five or six years to put new capacity into the field. Secondly, we are, like everyone else is, and we have been for a long time even before the crisis in Ukraine, always looked for a variety of ways to diversify our source of supply. But frankly, those sources are limited and without Russia, in the future, we are not participating or participating at the same level. It will put obviously extreme pressure on those supplies. So, we are continuing to look at ways to get products to market from a combination of sources that we have long-term contracts, and other sources that we found around the market. And of course, we're very focused like a laser beam on putting additional productive capacity into the market.

And then on the uranium sales in the quarter, traditionally, your uranium sales have had, let's call it, low single-digit margins from let's say the 20 questions back and forth with you and the investment community. Was there any higher margin on this sale because of the size of it and the higher uranium prices? Or was it still in that lower single-digit range?

Yes. So you're exactly right, Joe. I mean, we did have good uranium sales. But from a margin perspective, it was slightly more. But remember, this uranium, and that's in our main business, is a byproduct of selling SWU. So when we sell it, we sell it at market, and the market was going up slightly. But what we show is that minimal margin because it's a byproduct of SWU.

Next question comes from Richard Fels with Private Investors. Please go ahead.

Obviously, everyone is happy with the trend of where Centrus is going. I have two questions. And I'll tell you what they are, and then you can choose how to answer them. The first one is what difficulties are you having or incurring in maintaining or acquiring professional research staff to do this work? And secondly, with roughly $180 million, $190 million of cash, where would I find the interest that you're earning on that? I'm assuming and maybe you care to discuss it, I'm assuming you're buying just short-term U.S. Treasuries. But that should add another $8 million to $10 million a year of interest. And so those are the two questions I have.

I will take the first, and I will let Philip take the second. We don't actually have research staff per se, and we don't need it. If I'm understanding the question correctly, we have an incredibly capable engineering staff. We have incredible operators. We have marketing people. And we do certainly, and our people in the marketing department do stay abreast of market research, but we're not a research organization per se. I would say we're more a consumer than a producer of research. And we just are focused on doing the business in both the LEU segment by buying and selling material, and in this Technical Solutions segment, getting our technology deployed, expanded, and then obviously supporting the whole business by getting the things financed. So we, as I say, we are not really a research organization; we're more an operational organization.

Yes. On the interest, first of all, we have a little over $200 million on our balance sheet. We're very conservative in what we invest in. I'm going to let Kevin Harrill talk about that. Kevin, do you want to talk about?

Yes, absolutely. Thank you, Philip. In the materials that we distributed as part of the press release on the income statement, if you go to the line item investment income, we've actually recorded $2.2 million for the three months ended June 30 and $4.1 million for the six months ended June 30, 2023. And so that's where you would actually locate it on the income statement and the financial statements. And as Philip noted, it is in short-term investments, low risk, and we're earning high interest rates on that, no different from what you're seeing in the current interest rate environment with money market funds.

Sure. That's the $8 million to $10 million that I estimated that you would be earning. Does that make sense? So no staffing issues at all to help facilitate the contracts.

That's a different question. Yes, let me go where I think you want to go. The whole industry is challenged. When it comes to human resources, let me put this in some context for you. There's a very interesting, you probably have read it, commercial lift-off report published by the U.S. Department of Energy, I believe it was in March. And they said to meet our national global targets to reach net zero by 2050, even with a very robust build-out of wind and solar and renewables, we're going to need 200 gigawatts of new nuclear power. Now, to put that in context, we have about 90 gigawatts today. So we have a huge industry-wide challenge in terms of supply chain and in terms of talent pool. When I was in government, we worked very hard on trying to get that new generation into the market. The good news is there's now enough excitement and enthusiasm around the nuclear promise that young people, which we need, are coming in. But this is going to be for Centrus and for everybody a continuing challenge, and we have an additional challenge because of the sensitivity of our technology; many of our workers need to have security classifications, clearances, and so forth. So, I don't mean to be glib about that at all. It's a challenge. But I guess I'd make one other point, which is we have been very, very fortunate to partner with such really outstanding sources of good talent. The Navy continues to be just a phenomenal training ground for the highest quality candidates that we could search for. And of course, we have robust cooperation with the trade unions who do a lot of training, and I invite you to check out what they do, the National Association of Building Trade Unions, the International Brotherhood of Electrical Workers, and the United Steelworkers, and so forth. So there is a lot of work going on to strengthen and make that supply chain of human talent more robust. And the last thing I'll invite your attention to is a very interesting report from 2017, both by the Energy Futures Initiative, about the ecosystem that exists between a vibrant commercial sector nuclear and the national security enterprise. This goes all the way back, I know I've mentioned President Eisenhower twice. This goes back to the 1950s, where Admiral Rickover and President Eisenhower leveraged a big investment in the United States made in a nuclear Navy and used that to stimulate the whole domestic commercial industry, with huge success. So, we have human resource constraints, like everyone else does, but we're working hard and very excited to deal with that as we have a robust buildup of our capacity.

Thank you. There are no questions at this time. I would like to turn the floor back over to Dan Leistikow for closing comments.

Thank you, operator. This will conclude our investor call for Q2 2023. As always, I want to thank those listeners online and investors who called in, and we'll look forward to speaking with you again next quarter.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.