Centrus Energy Corp. (AMEX:LEU) Q3 2023 Earnings Call Transcript

Centrus Energy Corp. (AMEX:LEU) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Greetings, and welcome to the Centrus Energy Third Quarter 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Leistikow, Vice President, Corporate Communications. Thank you, Dan. You may begin.

Dan Leistikow: Good morning. Thank you all for joining us. Today's call will cover the results for the third quarter of 2023 ended September 30. Today, we have Dan Poneman, President and Chief Executive Officer; and Kevin Harrill, Chief Financial 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 follows our earnings news release yesterday. We expect to file our report for the third 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 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.

An aerial view of a nuclear plant, its domes casting a unique shadow.

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 8, 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 expressed 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: Thank you, Dan, and thank you to everyone on the call today. This was another great quarter for Centrus. While we always remind investors that our business runs on a year-to-year basis, not fairly represented by quarterly results, we were nevertheless pleased to deliver $8.2 million in profit to our shareholders this quarter. This time, the big news, however, is measured neither on a quarterly, not even on an annual basis, but rather on a scale of threescore-and-ten. Why so? Because a few weeks ago, Centrus inaugurated the first new U.S.-owned U.S. technology uranium enrichment plant to start production in nearly 70 years. As we speak, Centrus is now producing High-Assay, Low-Enriched Uranium or HALEU right here in the United States, in Piketon, Ohio to be specific using parts, we manufactured in Oak Ridge, Tennessee, with an American workforce, rebuilding America's domestic nuclear supply chain.

That is a historic accomplishment. Last month, we were pleased to host so many people who care about America's energy future and national security who came to Piketon to participate in the launch of this 16-centrifuge demonstration cascade. Our speakers included leaders from government, labor and industry, Senators Sherrod Brown and Rob Portman, Congressman Chuck Fleischmann, Deputy Secretary of Energy, David Turk, DOE Assistant Secretary for Nuclear Energy, Katy Huff, North America's Building Trades Union's President, Sean McGarvey, National Association of Manufacturers President and CEO, Jay Timmons and Pike County Commissioner, Tony Montgomery. Representatives from advanced reactor companies, utilities, nongovernmental organizations and local community organizations all participated.

So did our brothers and sisters from the United Steelworkers, International Brotherhood of Electrical Workers, the buildings trades and the pipe-fitters, all came to witness America taking an essential step to restoring the global leadership in nuclear fuels that we once enjoyed and should never have lost. Building on that momentum, Centrus now has completed production of the first 20 kilograms of HALEU. That means that we have demonstrated that our technology works and that we have completed Phase 1 of the contract we signed with the department in 2022. Notably, we did so under budget and nearly 2 months ahead of schedule, a rarity for a first-of-a-kind project in the nuclear arena and a testament to the team's extraordinary work. In Phase 2 of the operations contract, we are required to produce 900 kilograms of HALEU for the department over the next 12 months.

Under the contract, the Department of Energy is obligated to provide the HALEU storage cylinders necessary to collect the output of the cascade. Centrus will fill the department cylinders with HALEU and deliver that material to a secure fissile material storage area we've built. Shareholders may recall that Phase 1 of the contract required a 50-50 cost share with the Department of Energy. In Phase 2, DOE will pay the full cost of production plus an incentive fee, and the department will receive the output of the cascade. In Phase 3, subject to the availability of appropriated funds, the department has the option to grant up to 3, 3-year extensions. If combined with Phase 2, that could add up to 10 years of production overall on a cost plus incentive fee basis.

While this contract is critical in demonstrating the viability of our technology and providing up to 9,000 kilograms of HALEU to the Department of Energy to support the developing advanced reactor market, what's even more important is that it establishes a strong foundation to build more machines and expand production to address any level of demand for a secure domestic source of both HALEU and low-enriched uranium or LEU. The way Americans think about supply chains and domestic resilience in the face of critical challenges has shifted dramatically over the past few years. The supply chain bottlenecks uncovered by the COVID pandemic, followed by the crisis facing the U.S. semiconductor industry and finally, the invasion of Ukraine made Americans realize ever more clearly the importance of ensuring that we have a robust domestic supply chain for commodities that are vital to our national security and economic well-being.

It has become as clear as day that it is foolish to rely exclusively on foreign state-owned enterprises for such things as in this case, the nuclear fuel that powers 1/5 of our nation's electrical grid and provides nearly half of our carbon-free electricity. But through a series of missteps and misfortunes, that is exactly what happened. In the commercial market for LEU, 100% of the world's uranium enrichment capacity now belongs to foreign state-owned enterprises. According to the latest figures from the World Nuclear Association, Russia alone holds 44% of the world uranium enrichment capacity. There is simply not enough non-Russian enrichment to fuel the world's reactors. Adding in China, those 2 suppliers account for more than half of global capacity.

As end users look to secure long-term contracts for fuel from suppliers outside of Russia or China, their options are limited. To transition the United States, Europe and other friendly countries around the world away from dependence on Russia, the market will need more supply and more suppliers to provide secure, diversified sources of fuel for their reactor fleet. We believe that Centrus as America's uranium enrichment company is well suited to help fill the gap and bring greater supply diversity to the marketplace for LEU as well as HALEU. While LEU is essential to fuel the 93 reactors already operating in the United States, HALEU is the fuel of choice for most of the advanced reactor designs now under development. And Centrus currently has the only Nuclear Regulatory Commission license to produce HALEU in the United States.

In fact, until last month, Russia was the only commercial HALEU producer in the world. Having our demonstration cascade up and running gives us a critical beachhead as we look to build a scaled-up facility able to satisfy HALEU demand as it develops in the next few years. We will continue to advance our technology, train our workforce, maintain our NRC license and expand our capabilities, all of which will support our commercial expansion in the years ahead. A commercial-scale cascade with 120 centrifuges can produce about 6 metric tons of HALEU per year. With adequate funding and support, we have the capability to bring in initial commercial scale cascade online within 42 months. Having built out that supply chain, Centrus could then add a second HALEU cascade 6 months later, and then bring all subsequent cascade online every 2 months thereafter, once we have built out that supply chain and leverage the learning and improvements we make every time we build a new cascade.

That is how American industry has always driven efficiency. We have the technology, the license, the site, the space, the skills and the ability to do this. Having a passionate and experienced workforce is essential. Now we are looking for the investment and the firm orders needed to unleash these capabilities and restore a domestic uranium enrichment capability at industrial scale. Of course, it is never easy to reestablish a lost industrial capability in a strategic sector completely controlled by foreign state-owned enterprises. So success will depend on government investment as well as private capital. That is why the emerging consensus around the need for significant government investment on both sides of the aisle and at both ends of Pennsylvania Avenue is so encouraging.

But government needs to know that the private sector is also prepared to step up and do its part, and we are. Reactor developers that will need significant amounts of HALEU for their projects that are expected to come online in the next few years are beginning the process of securing the source of that HALEU sooner rather than later. There's perhaps no better illustration of this urgency than the memorandum of understanding that we signed during the third quarter with 2 leading advanced reactor developers TerraPower and Oklo. Under these MOUs, we intend to work toward definitive agreements that would help establish a cost competitive and timely source of enrichment capacity for TerraPower's Natrium demonstration reactor ahead of its 2030 operations date, and that would help Oklo not only fuel their Aurora powerhouses, but also manufacture reactor components and potentially provide fuel fabrication services as well.

These efforts would leverage our facilities and technical capabilities in Piketon as well as our advanced manufacturing facility in Oak Ridge, Tennessee. So this is a moment of promise and hope for the industry and for the nation and we look forward to building on recent successes to create a more secure and prosperous energy future. With that, I'm very pleased to turn it over to Kevin Harrill, who recently transitioned as the company's Chief Accounting Officer to our new Chief Financial Officer. Kevin?

Kevin Harrill: Thank you, Dan. Good morning, everyone. It's great to be speaking with you. As Dan just reminded us, our financial results vary from quarter-to-quarter based upon timing of contracted deliveries. Most of our LEU contracts are multiyear arrangements in which customers have annual purchase obligations, but can choose which quarter to take delivery. We book the revenue and cost of sales in the quarter when deliveries are made, which can vary throughout the year, but tends to even out on an annual basis. For the third quarter, we recognized total revenue of $51.3 million, which was an increase from $33.2 million in the same quarter last year. At the segment level, the LEU business had revenue of $40.5 million on cost of sales of $30.4 million, earning a gross profit of $10.1 million for the segment.

Our Technical Solutions segment, which includes our HALEU contract with the DOE, generated $10.8 million of revenue on cost of sales of $9.6 million, for a segment profit of approximately $1.2 million. As Dan mentioned, we achieved $8.2 million in net income for the quarter compared to a loss in the prior year of $6.1 million. At quarter end, we had $183.3 million of cash on our balance sheet, providing us with liquidity to invest strategically in our future and manage our working capital obligations. Our LEU order book remains strong with backlog of approximately $1 billion through 2030. Our Technical Solutions segment, which, as I mentioned, includes our HALEU contract, represents additional revenue and earnings upside as we look ahead. Lastly, we recently took a crucial step to derisk and strengthen our balance sheet.

On October 12, the company reached an agreement to purchase a group annuity contract that will cover approximately 1,400 retirees and settles more than 40% of our outstanding pension liabilities. The annuity contract will fulfill the plan's commitment, but is anticipated to reduce ongoing future costs for Centrus. The annuity contract transfers $186.5 million in liabilities in exchange for $171.4 million of plan assets to the new insurer. As a result of this transaction, we expect to recognize a gain of approximately $15.1 million in our income statement for the fourth quarter, dependent upon the final settlement and pricing of the annuity transaction. We reduce our risk, lower our administrative expenses and strengthen our balance sheet, while continuing to honor our commitments to retirees.

More broadly, this is yet another milestone in strengthening our financial position over the last several years. At the beginning of 2015, shortly before Dan took over as CEO, the company had $179.3 million in unfunded pension liability from our legacy business. As of September 30, 2023, we estimate that our 2023 unmeasured net pension obligation would be approximately $42.2 million. This would represent a reduction of more than 75%. To further emphasize this point, at the beginning of 2015, our net pension liability was more than 4x greater than our market cap. As of September 30, the liability was down to approximately 5% of our market cap, and that's before the annuity purchase in October, which will reduce it even further. With that, let me turn things back over to Dan.

Daniel Poneman: Thank you, Kevin. This has indeed been a momentous year for nuclear energy. And as we turn the corner and head into 2024, we're more excited than ever about the trends we're seeing, not only in technology and government, but also in the investment community. Growing investor interest in sustainability and in creating significant new employment opportunities in clean energy is finding its way to the nuclear sector, and will contribute to better capitalized companies across the nuclear energy value chain. We are proud to have long-standing partnerships with reactor developers and utilities, and are building new relationships with a growing number of data centers and industrial companies that need to obtain vastly increasing amounts of clean and reliable energy to generate electricity and drive industrial processes.

At every level of government and across academia and nongovernmental organizations, we see increasing levels of institutional support for the reemergence of the American nuclear industry to support our national energy, climate and national security objectives. The efforts of many different companies from component manufacturers and developers, to utilities and the investors financing these projects are establishing the foundation and ecosystem for a thriving advanced nuclear industry, where Centrus can play a pivotal role. While no one can say with certainty which nuclear reactor technologies will end up being deployed at greater scale, Centrus stands ready to supply all of them as they come to market. As we consistently emphasized, this tremendous investor support will require further public private partnership.

Recent developments prove that both the administration and Congress agree with that. Just last month, the House of Representatives included a $2.4 billion investment in domestic uranium enrichment as part of the Energy and Water Appropriations bill, and the White House included $2.2 billion for enrichment in its most recent supplemental funding request. And over the summer, the Senate voted 96 to 3 to authorize a major nuclear fuel security program. The Senate also included enrichment funding as a priority in their energy and water appropriations bill. All of us can be encouraged by the bipartisan support and momentum behind these proposals, and hope that Congress and the administration will move quickly to get them over the finish line. Of course, none of this would be possible without our amazing employees and without our investors who are supporting us in this important work.

Sincere thanks to each and every one of you. Finally, I'd like to offer heartfelt thanks to all of our veterans who courageously served to protect the great way of life in our United States. We have come a long way in the last few years, but I truly believe the best is yet to come. And with that, we'll take your questions. Operator?

Operator: [Operator Instructions]. Our first question comes from the line of Rob Brown with Lake Street Capital.

Robert Brown: You gave a good overview of some of the activities happening for support in the various government bodies. But I just want to get a sense of how soon those things need to happen for you to kind of continue your work. Or are you -- do you have the pieces in place to kind of continue to produce HALEU until those other pieces kind of come in, in terms of getting supply going?

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