Q2 2023 Centrus Energy Corp Earnings Call
Participants
Dan Leistikow; VP of Corporate Communications; Centrus Energy Corp.
Daniel B. Poneman; CEO, President & Director; Centrus Energy Corp.
Kevin J. Harrill; Controller & CAO; Centrus Energy Corp.
Philip O. Strawbridge; Senior VP, CFO, Chief Administrative Officer & Treasurer; Centrus Energy Corp.
Joseph George Reagor; MD & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division
Richard M. Fels; MD; Odeon Capital Group LLC
Robert Duncan Brown; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division
Presentation
Operator
Greetings, and welcome to Centrus Energy Second 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, Mr. Leistikow, you may begin.
Dan Leistikow
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 Centrus is strictly prohibited. Thanks for your participation. I'll now turn the call over to Dan Poneman.
Daniel B. 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 to our 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 center futures 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 and for 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, 3 tablespoons of which could support 1 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 9 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 9 different HALEU fuel reactor designs and critically need 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 10-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 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, and 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 paled production. With support from the Department of Energy, TerraPower is building a commercial scale Natrium reactor in Kemmerer, Wyoming. Under this MOU, our 2 companies are evaluating how to expand our capacity in Piketon, so that we can deliver HALEU in the quantities and on the time line necessary to support the '23 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.
Philip O. Strawbridge
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 4 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 booked 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 the 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 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.
Daniel B. Poneman
Thank you, Philip. This year, 2023 is the year of decision. There is now broad consensus that restoring a domestic uranium enrichment capability is vital to America's national interests to our national security, our energy security, our climate objectives, our clean energy needs, our supply chain resilience to the health of the American economy and to creating good family-supporting jobs.
That recognition was already present and reflected last year when Congress appropriated, $700 million in the inflation Reduction Act as a down payment on establishing a domestic halo supply chain. Even at that time, it was widely recognized that additional federal investments would be required, and that momentum has carried into this year, despite the fact that some people say it's impossible to find consensus in Washington anymore. Turns out that the urgent need to restore America's domestic uranium enrichment capability is one area of broad bipartisan agreement.
In recent weeks, Republicans and Democrats in both the house and the senate have advanced proposals to make a major federal investment to rebuild America's nuclear fuel supply chain, including low enriched uranium as well as HALEU. New appropriations for enrichment have passed through committee in both houses of Congress. The Senate Energy and Water Appropriations bill includes $800 million. The House version has $2.4 billion. There's still a lot of work to be done to get those bills passed, reconciled with one another and sent to the President. But this is the strongest bipartisan support we've seen for an investment in Americas Enrichment Capacity in decades. Meanwhile, in late July, the Senate approved an amendment from Senator Barraso, Mansion and Rich to the National Defense Authorization Act that authorizes and direct the Secretary of Energy to jump start construction of new domestic enrichment by purchasing significant quantities of low entertain and HALEU.
Because the NDAA is considered must pass legislation, it's difficult to see hundreds of amendments get proposed, but only a handful make it through. This year was no different with over 900 amendments introduced. The amendment authorizing investment in uranium enrichment was 1 of only 8 that were adopted by individual boats and it passed by an overwhelming margin of 96 to 3. This was a historic vote worthy of the legacy of President Eisenhower Atoms for Peace initiative and a potential game changer for our industry. I'm extraordinarily grateful to members of the House and the Senate in both parties who have come together to address the urgent energy security and national security issues at stake here.
The time to restore America's domestic uranium enrichment capacity is now, and we are determined to do our part to make it happen. I also want to thank all of our investors who are supporting us and have for so long in this historic and important work. Finally, on a personal note, I want to thank our outstanding CFO and Senior Vice President, Philip Strawbridge, who, after doing an incredible job at Centrus for nearly 4 years, has decided to retire as of December 31. This is a bittersweet moment for -- while we are happy and grateful for the great work Philip has done advancing the mission of this company and the interest of our shareholders, we will sorely miss his leadership and wise counsel.
Fortunately, in Kevin Harold, the company has found a worthy successor to Philip and as Chief Accounting Officer for the past 2 years, Kevin has also done a terrific job in all matters of substance as well as managing an accurate and efficient reporting process which our shareholders have come to appreciate with the filing of each of our quarterly and annual earnings reports. Kevin will take over the role as CFO effective September 1, and Philip will step into the role as an adviser to me and to the Board of Directors until its final retirement in December to ensure a smooth transition.
All of us at Centrus join me in expressing our sincere gratitude to Philip and wish him enjoyment and success as he writes his next chapter. And with that, we'll take your questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) The first question comes from the line of Rob Brown with Lake Street Capital Markets. Please go ahead.
Robert Duncan Brown
Just wanted to clarify on the DOE draft proposal. What's sort of the draft RFP what's sort of the time line on getting the next steps there and you see at this point? And then in general, what's sort of the kind of methodology that the DOE starting to coalesce around in terms of the support of these sort of commitments to buy by materials? Or are they capital commitments upfront? Or how is it sort of shaking out at this point?
Daniel B. Poneman
Rob, as always, it's a great question, but I'm pretty consistent not speaking on behalf of the U.S. government because I'm not part of it anymore. I would just say that in terms of the time line, everyone is very aware of the requirements in the Energy Act of 2020 to have HALEU available for the use of these advanced reactors. Those reactors are supposed to begin operations later this year. So people are looking at 2026, 2027. But in terms of the actual process, as you know, they issued this draft RFP, I think it was around June 6. We had to get our comments in around July 6. Typically, it takes some time to go over the comments. My understanding is that there were a lot of robust comments.
The structure of the program, Rob, I think, remains in question. There is -- if you look at the RFP, a number of considerations in terms of what burden will fall on the shoulders of the contractor. The decision by the department to buy the end product or to buy just the separate work component and the HALEU aspect of it, not the LEU [pedote] a number of issues that are, I think, being reviewed and studied and we're eager to see that come out, but I would not be able with confidence to predict when the department will act because that's ultimately up to that.
Robert Duncan Brown
Okay. 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?
Daniel B. Poneman
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 share. So once we're past Phase I and Phase II and the 16 machines are indeed sufficient, Rob, to produce the 900kg 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. And it's 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 and per year. And therefore, that's assuming 4.95% feedstock, therefore, within 42 months. If you add a ton effectively 900 kilograms got to a ton, plus 6 tons, that would be 7 tons, and then we put another cascade on 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.
Operator
Thank you. Next question comes from the line of Joseph Reagor with the ROTH MKM.
Joseph George Reagor
Dan and Phil and team. So 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 bands the purchase of in Red store, unenriched uranium out of Russia. How do you, in 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?
Daniel B. Poneman
Well, Joe, of course, can't get into specific contract terms on the one hand. On the other hand, the first thing that must be said is there was a universal recognition that given that Russia accounts for 46% of the world's installed base that it is an urgent priority and 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. And everyone also recognize that it will take 5 or 6 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 future were, in fact, not any longer to be 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 product to market from a combination of sources that we have long-term contracts, 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.
Joseph George Reagor
Okay. Fair enough. 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 call it 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?
Philip O. Strawbridge
Yes. So you're exactly right, Joe. I mean, we did have a good uranium sales. But from a margin perspective, it was slightly more. But remember, this uranium, and that's on our main business, it's a byproduct by selling SWU. And so what we do is when we sell it, we sell it at market, market was going up slightly. But what we show is that minimal margin but it's because it's a biproduct of SWU.
Operator
Next question comes from the line of Richard Fels with Private Investors.
Richard M. Fels
Right. Obviously, everyone is happy that the trend of where Centrus is going. I have 2 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 2 questions I have.
Daniel B. Poneman
Okay. 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 and both in the LEU segment buying and selling material and in this Technical Solutions segment, getting our technology deployed expanded and then obviously supporting the whole business, getting the things financed. So we as I say, we are not really a research organization. We're more an operational organization. Phil, would you take the other?
Philip O. Strawbridge
Yes. On the interest, first of all, we have a little over $200 million on our balance sheet. And very conservative in what we invest in. I'm going to let Kevin Harrill talk about that. Kevin, do you want to talk about?
Kevin J. Harrill
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 3 months ended June 30 and $4.1 million for the 6 months ended June 30, 2023. And so that's where we actually you would 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.
Richard M. Fels
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.
Daniel B. Poneman
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 0 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 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 see 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 candidate 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 U.S., the United Steelworkers and so forth. So there is a lot of work going on, on strengthening and making 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 1950 where admiral Rickover and President Eisenhower leveraged a big investment in the United States made in a nuclear Navy and use that to small in the whole domestic commercial industry and with huge success. So they made the shipping port reactor design available and a little less known. President Eisenhower made, at that time, $1 billion, it would be like worth $10 billion worth of uranium enrich uranium available to support that.
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.
Operator
Thank you. There are no questions at this time. I would like to turn the floor back over to Dan Leistikow for closing comments.
Dan Leistikow
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.
Operator
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
