Centrus Energy Corp Q4 FY2023 Earnings Call

Greetings, and welcome to the Centrus Energy Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lindsay Geisler, Director of Corporate Communications. Thank you. Please go ahead.

Good morning. Thank you all for joining us. Today's call will cover the results for the fourth quarter and full year of 2023 ending December 31. Today, we have Amir Vexler, President and Chief Executive Officer, and Kevin Harrill, Chief Financial Officer. Before turning the call over to Amir Vexler, 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. They expect to file a report for the fourth quarter and full year 2023 on Form 10K later today. All of our news releases and SEC filings, including our 10K, 10Qs, and 8Ks, 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 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 10K and quarterly reports on Form 10Q. Finally, the forward-looking information provided today is sensitive and accurate only as of today, February 9th, 2024, 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 Amir Vexler.

Thank you, Lindsay. And thank you to everyone on the call today. I've only been on the job for a few weeks, but I'm tremendously impressed with this organization and the people who make it run. This is a pivotal time. As the United States looks to transition away from imported nuclear fuels and bolster energy security, our country and our industry have never needed us more. As reactor developers race to commercialize next-generation reactor designs, a domestic source of advanced fuel for those reactors has never been more urgent. As utilities look to strengthen and diversify their fuel supply chain, the need for a new American source of uranium enrichment has never been clearer. And now that Centrus has proven enrichment operation in Pyrton, our potential to meet these growing needs has never been greater. There is so much that this company can do for our country and our customers in the next few years, which is only possible because of the continuing support of our investors. I appreciate the chance to share a few thoughts with you today and look forward to our continuing dialogue in the months and years to come. We start from a position of strength, coming off of an outstanding year for the company. In 2023, Centrus achieved $320.2 million in revenue, the highest in eight years. We delivered $84.4 million in annual profits, a 66% increase from 2022. We continue to add to our long-term order book in our LEU segment, which remains around $1 billion. And we ended the year with an unrestricted cash balance of close to $201.2 million, putting us in a strong position going forward. Our revenue growth was driven by a 14% increase in our LEU business segment, driven by larger sales volume of both SWU and uranium. At the same time, our team won $189 million in new sales contracts and commitments last year, sales that included deliveries and revenue generation through 2030. This was also a big year for our technical solution segments. We completed Phase 1 of the HALEU contract, finishing construction of a cascade of advanced centrifuges, bringing it into operation and delivering the first 20 kilograms of High-Assay Low-Enriched Uranium or HALEU, to the Department of Energy. We did it ahead of schedule and under budget, demonstrating not only the effectiveness of our technology, but also our excellence in project management. While the output of the initial cascade is modest, the government urgently needs every bit of HALEU we can produce as fast as we can produce it. Indeed, the Department of Energy has made a multi-billion-dollar commitment to support deployment of HALEU-fueled reactors, while the Department of Defense is developing HALEU-fueled microreactors that could support our troops around the world. Right now, the Pyrton Cascade is the only source of freshly enriched HALEU in the western world. We are proud to be in a position to support these vital missions and deliver real value to taxpayers. Phase 2 calls for us to operate the cascade for a year and deliver the Department of Energy 900 kilograms of HALEU. Our contract also includes an optional third phase in which the Department can purchase up to nine years of additional production from the cascade. Phase 3 is at the Department's sole discretion and is subject to the availability of congressional appropriations. Under the contract, the Department is responsible for providing the HALEU storage cylinders to collect the output of the cascade. They have provided a few cylinders for us to get started with production and they have ordered more, but the Department has experienced supply chain delays. The centrifuges will continue to operate, but the quantity of HALEU we are able to withdraw from the cascade in Phase 2 is limited by the number of cylinders the Department can provide and will be less than 900 kilograms. We don't anticipate a material financial impact on Centrus since we are meeting our obligations and the Department is compensating us on a cost-plus and fee basis in Phase 2. We expect that the delays in receiving the storage cylinders will be resolved sometime later this year and we don't anticipate this will be an ongoing issue after Phase 2. We have restored America's ability to enrich uranium. Now we need to do it at scale. What our Pyrton team has accomplished is remarkable. The first new U.S. owned uranium enrichment plant to begin production in nearly seven years. Enrichment capacity per machine is the highest for any centrifuge ever built anywhere in the world. Each component is manufactured to the most exacting standards enabling a 40-foot-tall centrifuge to remain perfectly balanced while spinning a load of uranium at incredibly high speeds, fast and powerful enough to separate two isotopes that have only a 1% weight difference between them. It is an incredible technical achievement. I'm impressed not only by the cascade and the workers who built it but also by the enormous potential of the facility. It has a footprint roughly the size of the Pentagon. Hundreds of thousands of square feet of floor space, room to accommodate more than 10,000 centrifuges. Heavy steel plates in the floor neatly laid out row upon row, each one marking the position where a centrifuge can be installed. The potential for large-scale production of LEU for existing reactors as well as HALEU for advanced reactors is right there and waiting. Like any important worthwhile endeavor it will not be easy. Deploying enrichment capacity for LEU or HALEU at scale is a capital-intensive exercise which is one reason why the rest of the world's enrichment plants are owned by governments. Here in the United States we will do so differently. It will require robust federal funding coupled with private investment, a public-private partnership that reflects not only the commercial value of the facility but also its value to national security, energy security, and other vital national interests. The good news is that momentum is building for such a solution. The war in Ukraine has focused the world's attention on energy security and supply chains for fuel including nuclear fuel. Russia has 44% of the world's uranium enrichment capacity and there isn't enough non-Russian enrichment to fuel the world's reactors. Russia and China together have almost 60% of the world's enrichment. Although the U.S. House of Representatives passed legislation late last year to prohibit the importation of Russian nuclear fuel, there is a growing understanding in the industry and among policymakers that transitioning away from dependence on Russia will take years and requires investment in new domestic capacity. The transition away from reliance on Russian material must be carried out in an orchestrated manner to maintain market stability. The market urgently needs a new American producer to expand the diversity and security of supply and we are the best positioned company to fill that role. As a first step, the Department of Energy released an RFP last month to begin purchasing HALEU, establishing a demand signal to bring new capacity online. We are well positioned to compete for that work as the only U.S. owned technology and enrich in the marketplace, especially since we could offer the fastest pathway to large-scale HALEU production. In addition, members of both parties in the House and Senate are advancing legislation to make a multi-billion dollar investment in uranium enrichment. It sometimes may seem like the parties can't agree on much, but they agree on this. Late last year, both Houses passed and the President signed legislation as part of the National Defense Authorization Act, creating a new program aimed at expanding U.S. production of both LEU and HALEU. To provide funding for that effort, the administration proposed $2.2 billion as part of a supplemental funding request. The Fiscal Year 2024 Energy and Water Bill adopted in the House included $2.4 billion, while the Senate version includes $800 million. Just this week, the Senate included $2.72 billion for domestic enrichment in a national security supplement. Like I said, it has to be a public-private partnership. We are in the private sector and ready to step up and do our part. Centrus looks forward to leading the way. With that, I'm going to turn things over to Kevin so he can walk you through some more of the numbers.

Thank you, Amir. Good morning, everyone. Centrus had an exceptional fourth quarter in 2023, but I'm going to focus my comments on the full-year numbers, which we believe are most meaningful given the variability in quarter-to-quarter revenue recognition. Our LEU customers have multi-year contracts to carry annual purchase commitments, not quarterly commitments. We record the revenue in the quarter the customer elects to take delivery. The pricing of those deliveries varies depending on the market conditions at the time the contract was signed. Because of this variability in volumes and prices from quarter to quarter, we always encourage listeners to focus on the annual performance. For the full year 2023, our revenue, net income, and cash balance are up significantly from a year ago. Our LEU business generated $269 million in revenue in 2023, an increase of $33.4 million compared to the prior year, mainly driven by higher sales volumes for both SWU and uranium. Our cost of sales went from $105 million in 2022 to $163.9 million in 2023. This was driven not only by higher volumes but also by higher purchase prices. That means that our gross margins in 2023 were down slightly from 2022 but were still profitable at 39%. We ended the year with a gross profit of $105.1 million in the LEU segment compared to $130.6 million in 2022. This was largely offset by our technical solution segment where we achieved a $19.7 million improvement in gross profit compared to 2022. Company-wide, our gross profit was $112.1 million, only slightly down from $117.9 million in the prior year. Technical solutions revenue for 2023 was $51.2 million against a cost of sales of $44.2 million. That compares to revenue of $58.2 million against a cost of sales of $70.9 million in the prior year. These differences year-over-year were driven by a one-time expense of $21.3 million recognized in 2022 which represented the company's portion of its anticipated cost share under Phase 1. And as Amir mentioned earlier, we fulfilled our cost share obligations with the successful completion of Phase 1. The contract is now transitioned to a cost-plus incentive fee model. In late 2023, we also took an important step to strengthen and de-risk our balance sheet by purchasing an annuity contract to transfer $186.5 million in pension obligations for about 1,400 of our retirees to an insurance company who will pay the retirees in full. That represents about 41% of our obligations under the largest of our two pension plans and more than 30% of our total pension obligation as of December 31, 2022. This action resulted in a $28.6 million gain for the company in the fourth quarter which is reflected in the non-operating components of net periodic benefit income line of our income statement. Our net defined benefit pension liability at year-end was $17.3 million down from $43.6 million a year ago. Our pension liability has decreased by approximately 90% since the beginning of 2015 when it was $179.3 million. This was approximately four times our market cap at that time. As of today, our pension liability is around 3% of our market cap. We ended the year with a cash balance of $201.2 million with an additional $32.6 million in restricted cash for a total of $233.8 million. Our strong cash position not only enables us to manage our obligations and make strategic investments in our future, but it also generated $8.7 million worth of interest income for the year. With that, let me turn things back over to Amir.

Thank you. Just as Kevin just outlined, 2023 was a tremendously successful year. I came to Centrus because I believe it is essential for the United States to restore a domestic uranium enrichment capability at scale, and this is the company that could do it. In my view, it was a tragic mistake for our country to have abandoned uranium enrichment, effectively feeding its leadership position to Russia. It put America's energy security at risk. It limited our global influence. It also left a gaping hole in our defense supply chain since the country no longer has the ability to enrich uranium for national security missions. This was not the fault of any one party or administration. It was a gradual erosion that unfolded over decades. What matters now is that we come together and fix it. Centrus is working closely with the Department of Energy, both parties in Congress, and our industry partners to forge a path forward that will enable us to reclaim our energy security and restore America's nuclear fuel supply chain. With that, we're happy to take your questions.

Thank you. Our first question is from Alex Regal with B. Riley Securities. Please proceed.

Hi. Good morning. This is actually Min on for Alex. I want to welcome you, Amir, and look forward to building a relationship here going forward. But congratulations on a really strong year. So it sounds like Phase 2 is set to be completed by November 2024, despite delivering less than 900 kilograms of HALEU. Do you have any sense for the timing of Phase 3 or just any updates on if that is moving forward?

Yes. Good morning. Thank you, Min. I appreciate the kind words and well wishes. Your question is about Phase 3 of the HALEU operations contract. If I understand it, then you're specifically asking if we know whether the government will utilize its options under the contract. Obviously, if that's the question, I have no ability to speculate and guess that. That is the government's discretion. It's their option. All I can say is we've performed in the contract very well. I think that our performance has been noted and well-regarded, but at the end of the day, Phase 3 is their option.

Okay. Just a quick question about your pension obligations. So it looks like you transferred the other union retirees. What are your plans for the rest of your pension obligations and kind of timing?

Yes. I'll field that question then. Thanks for the question and good to talk to you again as well. So we're very proud of what we did in the past year as it relates to that pension annuitization. We were in a unique position based upon the markets that we have been evaluating in the third quarter of last year to be in a position to get favorable terms for a portion of our pension benefits. What we're doing from a future looking perspective is constantly evaluating it. We have regular reviews of what are remaining pensioners that exist on our balance sheet at this point in time and we will evaluate further de-risking. We don't have any definitive plans today, but a lot of what we do is looking at the market and what the market conditions are and how we can actually realize benefits to continue to de-risk our balance sheet.

Thank you, Min. Our next question is from Rob Brown with Lake Street Capital Markets. Please proceed.

Hi, good morning and congratulations on a strong quarter in the year and also welcome Amir. My question is really on the HALEU contract of 900 kilograms that remain. I think you will not get to the full number, but maybe just describe how to what degree that you can't deliver because of the cylinders and I guess what's the economic impact in terms of revenue to Centrus for the year? Does that flow over to the following year or how does that work?

Okay. So I think it was communicated in the past as well. I'm sure it has been because I think I've listened to some of these discussions before. But under this HALEU operations contract, we are contractually required to provide storage cylinders that are required to collect the output of the cascade. However, we have experienced some supply chain challenges that created difficulties for the government in securing these cylinders. As mentioned earlier, the delivery of the HALEU has really been conditioned on their ability to deliver those cylinders to us in the timeframe that allows for continuous production in Phase 2. During the period when the cylinders are insufficient, the company will not be able to produce the HALEU that we're discussing here. But we will be able to continue operations of the cascade and perform preventive maintenance and other regulatory compliance activities over there. We anticipate that the delay in obtaining these cylinders is a temporary issue. But as mentioned earlier, we will not be able to achieve the 900 kilograms. We really don't expect an economic impact here.

Okay, thank you. And then you talked about another RFP released last month from the DOE. Could you update on sort of the timelines on when responses are due and how the latest RFP differs from some of the other ones that have come through?

There are two requests for proposals that came out. One was for the de-conversion and that's due next week. The other one is for the enrichment of HALEU, which is due on March 22nd. And to your question, how is it different? It is a long-awaited and anticipated RFP. It is a critical RFP to ensure that the ARDP program and the reactors that the DOE has been funding the development of will be able to fuel. So it is an important RFP for us. We intend to, and we're working very hard to answer and participate in both. As you can imagine, it plays right to our sweet spot to be involved in the enrichment part of it, and we intend to be part of it. I hope I answered your question.

Yes, that's great. Thank you. And if I could just ask one more about the purchase price activity and the margins at this point, what are the dynamics on the purchase prices in the contracts currently? Do you expect gross margins, I guess, to stay stable where they're at? Or do you see any trend changes in the gross margin going forward?

Okay, so I'm assuming that you're asking about the LEU business?

Yes, correct.

Okay, so the question is, I'm going to rephrase it, to make sure I understand it. You're asking how are the current market prices going to affect margins going forward?

Yes, it's really about gross margins going forward, either market prices or contracted prices or the purchase prices on the material you're buying.

Yes, so as you probably know, we have supply-type contracts and we have contracts in which we sell the material. Both of them have certain parts of the contract that are tied to the market. And the market pricing does affect, on one hand, it affects the supply in one way, and the other way it affects the sale on the other hand as well. Although I'm not able to provide any forward-looking guidance, I'm kind of trying to paint the picture of how things work. So on one hand, your supplied material is affected by the market, but you also sell at prices that are affected by the market. I can't give you any specific forward-looking statements, but I hope I gave you enough information here.

Our next question is from Joseph Reagor with Roth MKM. Please proceed.

Hey guys, thanks for taking the question and welcome here to the team. Thank you. I know that we're not going to get a guidance answer here, but maybe a different question. As you look at your contracts that you had in 2023 that led to the revenue you generated, were there any additional contracts that were added that will be for 2024 without quantifying how much that is? And were there any contracts in 2023 that roll off in 2024? Just so we have an idea of the total number of contracts out there?

Yes, thanks for the question, Joe. Unfortunately, that type of detail we don't typically provide. The one thing that I would highlight is that we consistently have a robust sales order book of about a billion dollars, and we've had that trending at that number for multiple years. I would also highlight the fact that we had $189 million of new sales. As we've articulated in the past, we do have a high level of visibility going out through 2030 with regard to our sales order book, but we couldn't get into any specifics as it relates to how those would matriculate over the next coming years, either for 2024 sales or ones in the past.

Okay, fair enough. And then on the question of the prior call, that's about margins. I think historically there was some expectation that you had some contracts that were at a much higher margin that had been locked in and you had a one-time reset option. Those contracts were expected to roll off in 2023, 2024, 2025, and therefore there would be some kind of natural decline in margins, but it hasn't really shown up. Is that a demonstration you guys have done a really good job of locking in new higher-margin contracts, or has there been a slight decline, but that's it? That's all we can expect?

No, from the margin perspective and specifically touching upon the legacy-based contracts that you referenced, I would note we still have about $282.6 million of deferred revenue on our books. Those are predominantly legacy-based contracts with higher priced SWU terms as well as margins. So we will anticipate those to continue to roll off in the future. And as you noted, Amir earlier, as we contract with customers, we do get favorable conditions based upon market prices today. Margins have been favorable based upon market conditions in the current year and the market commodity pricing curve that currently exists reflecting those higher pricing mechanisms as well. I would anticipate that, to your point, we will see higher margins for some of the recent sales as well as the legacy ones still rolling off in future years.

Okay. Is it possible to ask one additional question before I turn it over?

Yes, absolutely.

So in the fourth quarter, you guys had some of the lumpy uranium sales, right? Historically, the expectation on those would be that they'd be very low margin. But is it fair to assume that the margins were a little better than historically in Q4, given the run-up in uranium prices during the quarter?

That would be an accurate assessment. Yes.

Thank you. Okay. With no further questions in the queue, I would like to turn the conference back over to Lindsay for closing remarks.

Thank you, Operator. This will conclude our investor call for the fourth quarter and full year 2023. As always, I want to extend a thank you to our listeners online and our investors who called in. We look forward to speaking with you again next quarter.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.