Centrus Energy Corp. (AMEX:LEU) Q4 2023 Earnings Call Transcript
Centrus Energy Corp. (AMEX:LEU) Q4 2023 Earnings Call Transcript February 9, 2024
Centrus Energy Corp. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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. [Operator Instructions]. 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.
Lindsey Geisler: Good morning. Thank you all for joining us. Today's call will cover the results for the fourth quarter and full year of 2023 and in 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 Centres 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 Centres. Our actual results may differ materially from those in our forward-looking statement. 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 Centres energy.
Any transcription, redistribution, retransmission, or rebroadcast of the call in any form without the expressed written consent of Centres is strictly prohibited. Thank you for your participation, and I'll now turn the call over to Amir Vexler.
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 Centres 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, Centres 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 revenues 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-fuelled reactors, while the Department of Defence 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 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 the Department's sole discretion and the 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 sent a fee basis in Phase 2.
We expect that the delays in receiving the storage cylinders will get 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 US 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 and incredible 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 plate 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 position company to fill that role. As a first step, 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 U.S. technology and richer 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 House's 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. Fiscal year 2024 Energy and the Water Bill adopted in the House included a $2.4 billion, while the Senate version includes $800 million. And just this week, the Senate included $2.72 billion for domestic enrichment on a national security supplement. Like I said, it has to be 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. Kevin?
Kevin Harrill: 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 marking 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 cost of sales of $44.2 million. That compares to revenue of $58.2 million against 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 1400 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 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.
Amir Vexler: Thank you. Just -- 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 defence supply chain since the country no longer has the ability to enrich uranium for national security missions. This was in 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. Operator?
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