Earnings Call Transcript - LEU Q3 2021

Operator, Operator

Greetings and welcome to Centrus Energy's earnings call for the third quarter of 2021. This conference is being recorded. It is now my pleasure to introduce your host, Dan Leistikow, Vice President of Corporate Communications. Thank you. You may begin.

Dan Leistikow, Vice President, Corporate Communications

Good morning. Thank you all for joining us. Today's call will cover the results for the third quarter of 2021 ended September 30. Today, we have Dan Poneman, President and Chief Executive Officer; Philip Strawbridge, Senior Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer; as well as 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 tomorrow afternoon. 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 this Centrus website. I would like to remind everyone that certain of the 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, November 11, 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 express written consent of Centrus is strictly prohibited. Thank you for your participation. And I'll now turn the call over to Dan Poneman.

Daniel Poneman, President and CEO

Thank you, Dan, and thank you to everyone on the call today. I'd like to acknowledge, especially today, November 11, our veterans, which is a day that we honor and celebrate the sacrifice and contributions they've made to our nation to keep us safe and secure, and it's something that all Americans strongly owe a debt of gratitude to all of the veterans all over the country and wherever they may be. So Godspeed to all. I'm pleased to report that Centrus Energy had a strong and profitable third quarter of 2021. We generated total revenue of $91.3 million and earned net income of $42.1 million for the quarter. Our cash balance as of September 30 was $171 million, putting us in a strong position as we go forward. Our LEU segment continues to perform very well and deliver strong margins. This reflects not only the success we've had on the sales side, but also the fact that we were able to diversify and extend our supply base and take advantage of historically low enrichment prices a few years ago to lock in affordable enrichment supply through the late 2020s. As you may recall, at the beginning of 2019, a market-based price reset took effect in our largest supply that reduced our costs and significantly improved our margins. While our costs are lower, the uranium enrichment market has been steadily recovering with published price indicators for enrichment rising 63% compared to the low point in August of 2018. We've been steadily winning new sales to maintain the strength of our long-term order book for uranium enrichment, which is currently valued at $1 billion in sales through the end of the decade including approximately $320 million in deferred revenue and advances from customers. We have also made good progress in our efforts to pioneer production of high-assay, low-enriched uranium, or HALEU, a next-generation nuclear fuel that will be needed for most of the advanced reactor designs that are currently under development and may also be used in the existing fleet of reactors. Under our 3-year HALEU contract with the U.S. Department of Energy, we have finished assembling the centrifuges for the generation plant and construction of the support systems is well underway. We completed 2 additional milestones this quarter, meaning 9 of the 14 milestones in the contract have been completed on or ahead of schedule. As you may recall, in June, we secured approval of our license amendment application from the U.S. Nuclear Regulatory Commission making the American Centrifuge plant in Piketon, Ohio, the first and only U.S. enrichment facility licensed by the NRC to produce HALEU. We are proud to have achieved this critical milestone on the road to the restoration of American nuclear leadership. While Centrus has managed to keep our own construction work on track throughout the pandemic, as we have previously noted, the pandemic has affected some of our vendors, which has created significant challenges. The COVID-related challenges include increased delays from vendors and higher costs. We are working with the department to minimize the impacts and to address these cost increases as we go forward. We expect that the centrifuge cascade will be completed and ready to begin demonstrating HALEU production next year. At that point, subject to the availability of funding and/or offtake agreements, our goal is to scale up the plant. While the initial capacity will be modest and dependent on demand signals from potential customers, the Piketon facility is large enough to accommodate whatever level of production the market can support. As we look to the longer term, in addition to commercial requirements for fuel enriched to various levels between 4% and 20% uranium-235 content to support both existing and advanced reactors, there are also a number of U.S. government requirements for enriched uranium that Centrus is positioned to satisfy. Long-standing U.S. policy and agreements prohibit the use of foreign uranium and enrichment technologies for national security missions. The last U.S. technology-based enrichment plant was built in the 1950s and shut down in 2013. For the first time since 1945, the United States lacks any domestic enrichment capability that can be used for national security purposes. For now, the only way to meet those requirements is to draw down the country's finite stockpile of highly enriched uranium left over from the Cold War, but ultimately, a new domestic technology enrichment capability will be needed. Centrus' AC-100M centrifuge is the only deployment-ready technology that can meet these requirements today. As I said, this was another strong quarter for Centrus, as measured not only by our revenue and profit, but also by the steady progress we are making towards resuming our status as an enricher and pioneering a market for advanced nuclear fuels. Now for more details on the quarterly financial results, I will turn the call over to Philip. Philip?

Philip Strawbridge, CFO

Thank you, Dan. Good morning, everyone. As Dan mentioned, for the third quarter of 2021, we had total revenue of $91.3 million and achieved a net profit of $42.1 million. Revenue in the current quarter included $43.5 million related to the settlement of the company's claims for reimbursement for certain pension and post-retirement benefits incurred in connection with the past cost reimbursable contract performed at the Portsmouth GDP. Revenue from the LEU segment increased $13.3 million compared to the same quarter in 2020. Our cost of sales was $4.1 million higher in the third quarter compared to last year, largely reflecting increases in SWU sales volume, partially offset by decreases in the average SWU unit cost. Gross profit for the LEU segment increased $9.2 million in the 3-month period and $10.6 million in the 9-month period, primarily due to increases in SWU sales volume and decreases in the average SWU unit cost, partially offset by decreases in the average SWU sales price. Those of you who have participated in these calls before know that we've said our revenues and margins vary a lot from quarter to quarter, but it's the annual performance that matters the most. In our LEU segment, which represents the majority of our revenue, our customers typically have multiyear contracts that include an annual purchase obligation, but not a quarterly purchase obligation. The customer decides what month, takes their annual purchase commitment and that's in that quarter that we record the revenue for the customer's contract. 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 high or higher than they are today, and others were signed when prices were lower. So a quarter can look better or worse depending upon the price points of that particular contract that we're delivering for the quarter. Our technical solutions segment revenue increased by $44.4 million in the third quarter of 2021 as compared to the same period in 2020. As I mentioned previously, revenue in the third quarter of 2021 included a one-time payment of $43.5 million related to a settlement of the company's claims for reimbursement for certain pension and postretirement benefit costs incurred in connection with the past cost reimbursable contract. Costs for the sales of this segment increased $3.3 million in the 3 months ended September 30, 2021 compared to a corresponding period in 2020, largely reflecting the increase in the contract work performed. Now I'm going to talk a little bit about our SG&A costs. Our total SG&A increased $2.3 million in the 3 months ended September 30, which is mostly the result of a $2.2 million increase in incentive-based compensation expense as a result of our higher stock price. However, for the 9-month period ending in September 30, SG&A decreased by $600,000 compared to the corresponding period in 2020. Consulting costs increased $300,000 for the quarter and decreased $3.3 million for the 9-month period. As far as cash, we ended the quarter with a strong balance of $171 million, putting us in a good position going forward. One subsequent item of note that occurred after the quarter was in October, we launched a tender offer to purchase the remaining shares of our preferred stock. This was initiated to continue our efforts to clean up the balance sheet. That tender offer does not close until November 18, so we won't be providing any further detail until after that close. Now I'm going to turn the call back over to Dan.

Daniel Poneman, President and CEO

Thank you, Philip. Before we get to your questions, I'd like to speak to the broader picture when it comes to the deployment of the next generation of carbon-free nuclear power plants. A prominent feature in that picture was the 2020 launch by the U.S. Department of Energy of the Advanced Reactor Demonstration Program. In that program, the department selected 10 reactor designs for funding. 9 of those 10 designs are expected to require HALEU, including the 2 multibillion-dollar multiyear awards to X-energy and TerraPower to support construction of commercial scale HALEU field reactors by 2027. On August 10, the U.S. Senate approved a $1 trillion infrastructure package on a strong bipartisan vote of 69 to 30. That legislation, which was approved in the House late last Friday and will likely be signed into law by President Biden in the near future, provides a $2.5 billion appropriation over 4 years to the Advanced Reactor Demonstration Program, providing critical funding and momentum to the 2 large demonstration reactor projects on their road to successful construction and deployment. This investment is a clear sign of the growing and widespread support in this country for the advanced nuclear industry and the role nuclear will play in the fight against emissions and climate change. Another major development since our last call occurred in October when the United States Air Force announced plans to deploy a microreactor by 2027, selecting Eielson Air Force Base in Alaska as the site and outlined a detailed timetable for the procurement. The Air Force plans to issue a draft request for proposal, or RFP, this fall and a final RFP in February with the goal being to select a vendor by late 2022, begin construction in 2025 and enter commercial operations in 2027. If the effort is successful, it could lead to a larger scale deployment of microreactors at other military installations and potentially contribute to a large demand for HALEU. This is in addition to a separate effort underway called Project Pele, which is being funded by the Pentagon's Strategic Capabilities Office and aims to build a prototype HALEU field mobile microreactor within 3 or 4 years. The upshot of all of this is that there is growing consensus involving industry, government, nongovernmental organizations, academia and other stakeholders about the importance of deploying a domestic source of HALEU and a growing sense of urgency in achieving that goal. We intend to provide the solution that our industry, our nation, and our climate all need. And operator, we would be happy to entertain any questions at this time.

Operator, Operator

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

Robert Brown, Analyst

First question is on the kind of the pricing trends in the market around uranium and SWU. Maybe just give some color on how that's impacting your business and driving some of the market activity in terms of placing orders.

Daniel Poneman, President and CEO

Well, as you know, Rob, our business on the enrichment side is a different business than the specific trading in the underlying uranium commodity and our contracts are typically let on a very long-term basis with a lot of advanced notice. So it's not directly tied, point one. Point two, as you know, the nature of the enrichment business is that it’s typically the customer, the utilities that provide the uranium. So they are the ones who are facing that aspect of the market. The third point, however, is that there is obviously a complex relationship, as utilities make their decisions on their own fueling requirements because there is some substitution effect between uranium and enrichment. And obviously, as uranium goes up in price, it's more attractive to use less of it, which makes it more compelling to use more separable work, etc. So it's a highly complex algorithm and one that does not really affect our day-to-day activities. But overall, when you look at a secular basis, the rising market in natural uranium is part of a broader trend that I mentioned in my remarks of growing recognition of not only the importance but a growing set of investments in advanced nuclear, as well as a lot of interest in extending the life of the current fleet and investing in new reactors, not only in this country but quite robust interest on the international scene as well. So it’s, sorry, it’s a slightly longer answer, but it’s kind of a complex relationship.

Operator, Operator

Our next question comes from the line of Joseph Reagor with ROTH Capital Partners.

Joseph Reagor, Analyst

My main question is, while I understand that you don't provide guidance, could you share any qualitative insights regarding your expectations for next year based on the annual delivery requirements?

Daniel Poneman, President and CEO

Well, I would say I'll give a timeline to supplement. We expect modest increases in revenues and relatively steady margins. But beyond that, Philip, I don't know what more you wish to add?

Philip Strawbridge, CFO

Yes. Joe, as you know, we did give some guidance last year, and we gave guidance for '21 and '22. And so that guidance from our perspective still holds true, and that guidance is really attributable to the LEU segment. And what we said was just what Dan said, we expect that revenue to increase slightly year-to-year and that margins would hold approximately the same. So we still think that's good. As Dan mentioned early on, we've had good sales. So we see that the market is still very good. So we hope we'll get that guidance.

Joseph Reagor, Analyst

And that excludes onetime items, right?

Philip Strawbridge, CFO

That's correct, that's correct.

Operator, Operator

Our next question comes from Stephen Gengaro with Stifel.

Stephen Gengaro, Analyst

Just curious, sort of from a big picture perspective, when we look at U.S. electricity generation, we all hear how bad hydrocarbons are, necessary but bad right now. How do you think nuclear evolves over the next decade, say? I mean just from a big picture perspective, any thoughts you could share on kind of the importance of it relative to other renewables? And I mean, obviously, it's low carbon. But what are your thoughts on those fronts?

Daniel Poneman, President and CEO

That's a great question. The relationship between nuclear power and other energy sources is interesting and continually developing. Historically, coal has supplied about half of the electricity in the U.S., with nuclear and natural gas each providing around 20%, and the remaining 10% coming from hydro. Recently, wind and solar have gained traction. The decline of the coal industry and the rise of natural gas have reduced coal's share to about 20%. Although new nuclear capacity has slowed, it still contributes around 20% due to its high capacity factors, which exceed 90%. This consistent output is crucial, as more than half of the nation's carbon-free power comes from nuclear energy. As for the role of firm dispatchable power, it's essential for supporting renewable sources, which are intermittent. Solar energy isn't available when the sun isn't shining, and wind power depends on the breeze. To balance these, firm power sources are necessary, and nuclear stands out as the only major carbon-free option currently available. While there's ongoing discussion about using batteries, they are not yet capable of storing enough energy at a feasible cost. Research suggests that to cover the energy needs with batteries and renewables alone, we would require 6 to 8 weeks of battery storage, but we currently only have around 43 minutes nationwide. Nuclear power serves as an excellent complement to renewables. Notably, innovations like the Natrium reactor from TerraPower can store energy in heated salt, allowing for effective energy management during periods when demand is low. In summary, nuclear power plays a crucial role in supporting renewables as we strive to decarbonize the power sector, aligning with the ambitious goal of achieving net-zero emissions by 2050. Leading experts, including those from the International Energy Agency and the Intergovernmental Panel on Climate Change, agree on the necessity for a significant expansion of nuclear energy.

Operator, Operator

Our next question comes from the line of Joseph Reagor with ROTH Capital Partners.

Joseph Reagor, Analyst

Question on the accounting treatment for this one-time settlement. So I'm just trying to understand, you guys treat it as revenue, but it seems like it flowed through the cash flow statement as if it was a noncash item. So just any additional commentary you can give us as to how that worked exactly. Did you guys ever actually physically get the cash? Or is it just a noncash item? Or did you have to apply it to the pension or exactly how did that work?

Philip Strawbridge, CFO

Yes, Joe, I'll jump in here. The settlement was specifically for the pension and post-retirement benefits. The government instructed us to apply those funds directly. We did receive the cash, but we immediately allocated it to the pension plan. Additionally, we established a trust for the post-retirement plan. Consequently, that's why you don't really see the cash. It can be viewed as a noncash event. However, from a long-term perspective, this is positive because we are contributing more funds into the pension plan's assets, which ultimately reduces the cash we would need to invest in the future. So, it's a long-term benefit, but as you pointed out, the cash doesn't appear on the surface. Did that answer your question, Joe?

Operator, Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Dan Leistikow, Vice President, Corporate Communications

Thank you, operator. This will conclude our investor call for the third quarter of 2021. As always, we want to extend our thanks to our listeners online and those who called in, and we look forward to speaking with you again next quarter. Thank you.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.