Q4 2023 Centrus Energy Corp Earnings Call

Participants

Lindsey Geisler; Director of Corporate Communications; Centrus Energy Corp.

Amir Vexler; President, Chief Executive Officer, Director; Centrus Energy Corp

Kevin Harrill; CFO; Centrus Energy Corp.

Alex Rygiel; Analyst; B. Riley Securities

Rob Brown; Analyst; Lake Street Capital Markets

Joseph Reagor; Managing Director, Senior Research Analyst; Roth Capital Partners LLC

Presentation

Operator

Greetings and welcome to the Centrus Energy fourth-quarter 2023 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I
It is now my pleasure to introduce your host, Lindsey 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 ended 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 Wexler. 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 fourth quarter and full year 2023 on Form 10 K later today, all of our news releases and SEC filings, including our 10 K 10-Q's and 8-K's 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 risks and uncertainties, 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 sensitive and accurate only as of today, February ninth, 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 Wexler.

Amir Vexler

Thank you, Lindsey, and thank you to everyone on the call today. Have 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 a smaller 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 Piketon, 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 centers achieve $320.2 million in revenue, highest in eight years. We delivered $84.4 million in annual profit, 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 school and uranium. At the same time, our team won $189 million in new sales contracts and commitments last year does that included deliveries and revenues generation through 2013.
This was also a big year for our Technical Solutions segment. We completed phase one of the HALO 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 halo 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 Halo we can produce as fast as we can produce it. Indeed, the Department of Energy has made a multibillion-dollar commitment to support deployment of Halo fuel the reactors, while the Department of Defense is developing, Halo fueled micro reactors that support our troops around the world right now, the Piketon Cascade is the only source of freshly enriched payload 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 at Cascade for a year and delivered the Department of Energy 900 kilograms of Halo. 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 three is the department's sole discretion and subject to the availability of congressional appropriations under the contract, the department is responsible for providing the hailstorm 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.
Centrifuges will continue to operate, but the quantity of Halo we are able to draw from the cascade in Phase two 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 the cost-plus incentive fee basis in Phase two. 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 two. We have restored the America's ability to enrich uranium.
Now we need to do it at scale. What our Piketon team has accomplished is remarkable the first new U.S. owned uranium enrichment plant to begin production in nearly seven years, and the 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 lot of uranium at incredibly an incredible speed 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 build it, but also by the enormous potential of the facility, it has a footprint of roughly the size of the Pentagon, hundreds of thousands of square feet of floor space and 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 hey, before advanced reactors is right there and waiting like any important and worthwhile endeavor.
It will not be easy deploying enrichment capacity for LEU or hey, Lewis scale is a capital intensive exercise, which is one reason why the rest of the world 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 investments, 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 vinyl that and other vital national interest.
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 and 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 the first step Department of Energy released an RFP last month to begin purchasing Halo, 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 is richer in the marketplace, especially since we could offer the fastest pathway to large-scale HALO production.
In addition, members of both party 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 agree on much, but they agree on that 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 HALO to provide funding for that effort.
The Administration proposed $2.2 billion as part of the supplemental funding request, fiscal year 2020 for energy and water bill adopted in the House included a $2.4 billion while the Senate version included includes $800 million. And just this week, the Senate included $2.72 billion for domestic enrichment on the 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 and Centra's 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, and good morning, everyone. Centra's 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 flu 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 Solutions 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 onetime expense of $21.3 million recognized in 2022, which represented the company's portion of its anticipated cost share under Phase one. And as Amir mentioned earlier, we fulfilled our cost-share obligations with the successful completion of Phase one. The contract has 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 nonoperating 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.

Amir Vexler

As you just Kevin just outlined, 2023 was a tremendously successful year. I came to Centra's because I believe it is essential for the United States to restore 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 ceding its leadership position to Russia. It put America's energy security at risk 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 in default of any one party or administration. It was a gradual erosion that unfolded over decades. What matters now is that we come together and Centrus is working closely with the Department of Energy, both parties and 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?

Question and Answer Session

Lindsey Geisler

(Operator Instructions)
Alex Rygiel, B. Riley Securities.

Alex Rygiel

Hi, good morning.
This is actually Ben on for Alex. I want to welcome you to Meir and look forward to building relationship here going forward. But congratulations on a really strong year from.
So it sounds like Phase two is that to be completed by November 2024, despite delivering less than the 99 hundred kilograms of Halo Do you have any sense for the timing of Phase three or just any updates on that that is moving forward?
Yes, good morning. Thank you, Ashley. I appreciate the kind words and well wishes on your question is about Phase three of the HALO operations contract as I understand it, then you're specifically asking if we know whether the government will utilize its options under the contract as obviously if that's if that's the question, I have no ability to speculate that can get that. That is the government discretion. It's their option.
Now all I can say is we've performed under the contract very well. I think that our performance has been noted and well regarded. But at the end of the day, Phase three is their option.

Amir Vexler

Okay. From just a quick question about your pension obligation. So it looks like you transferred the union retiree. What are your plans for the rest of your pension obligation? And kind of timing.
You asked me that question, Ben, thanks for the question and good to talk to you again as well. So we were 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 part of last year. To Q3 of last year to be in a position to get favorable terms for a portion of our pension benefit community. And what we're doing from a future-looking perspective is constantly evaluating it. We have regularly reviews of what our remaining pension years that exist on our balance sheet are 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.
Great.
I'll get back in queue. Thank you.
Thank you.
And our next question is from Rob Brown with Lake Street Capital Markets. Please proceed.

Rob Brown

Good morning, and congratulations on a strong quarter in Europe and also welcome America.
Thank you.
My question on the pilot contract to 900 kilograms that remain in the Q, you will not get to the full number, but maybe just describe how to what degree that you can't deliver because it's the cylinders. And I guess what's the economic impact in terms of revenue to that centers for the year. Does that does that flow over to you in the following year?
Or how does that work?

Amir Vexler

Okay, so on, I think it was I think it was communicated in the past as well. And I'm sure it has because I think I listened to some of these discussions before. But under this halo operations contract, as you know, the deal is contractually required to provide five b. cylinders that are required to collect the output of the Cascade, but then they really did not they had some supply chain challenges that created difficulties for just deal with securing the 5B cylinders. And as mentioned earlier, the delivery of the 900 kilograms has really been conditioned on their ability to deliver those cylinders to us in the timeframe that allows for continuous production of Phase 2.
And during the period when the 5B there were insufficient, the company will not be able to produce the halo 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 really temporarily temporary issue. But as mentioned earlier, we will no longer be able to achieve the 900 kilograms a week really don't expect an economic impact here.
Okay.
Okay.
Thank you.
And then I think you talked about another RFP released last month from the DOE. Could you update on sort of the timelines and when responses are due and how the latest RFP difference differs from some of the other ones that have.
Okay.
And there is there's two requests for proposal that came out one was four the deconversion and that's due next week, and there's one that came out later on for the enrichment of Halo. And I believe that one is due on March 22nd and done your question, how is it different? While it is a long awaited and anticipated RFP, it is a critical RFPs to be able to ensure that the ARDP. program and the reactors that the DOE has really been funding the development of which are going to 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, that plays right to our sweet sweet spot, particularly the enrichment part of it and we intend to be part of it.
Yes, I hope I answered your questions, but that's great.
Thank you.
I'll ask one more about the purchase price kind of activity and the margins at this point, what are the sort of the dynamics on the purchase prices in the contracts at this point? Do you expect gross margins, I guess, to stay kind of stable where they're at? Or do you see any trend changes in the gross margin going forward?
Okay.
So so on, I'm assuming that that you are asking about the LEU business?
Yes, correct.
Okay.
So the question is on kind of rephrase and make sure I understand it. You're asking. How are the current market prices given affect margins going forward?
Yes.
It's really about gross margins going forward, either either market prices or contracted prices or the purchase prices on the material you're buying spot material.
So are as you probably know, we have a supply type contracts and we have contracts in which we sell the material on. Both of them have certain parts of the contract that is tied to market and the market pricing does affect on one hand, though it affects the supply in one way. And in the other way, it affects the sales on the other way 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 and your supplied material is affected by market, but you also sell at prices that are affected by market. So unfortunately, I can't give you any specific forward looking statements, but I hope I gave you enough information here.
Yes, that's perfect.
Thank you.
I'll turn it over.

Operator

Joseph Reagor, Roth MKM.

Joseph Reagor

Thanks for taking my question and welcome here to the 13.
Thank you both.
So I know that we're not going to get a guidance answer here, but maybe a different question on 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 kind of have an idea of the puts and takes of kind 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 order book sales order book of $1 billion, and we've had that trending at that number for multiple years. And I would also highlight the fact that we had $189 million of new sales. And so as we've articulated in the past, we do have a high level of visibility going out through 2030 with regards to our sales order book. But we couldn't get in to any specifics as it relates to how those would matriculate over the next coming years, either for 2020 for sales or for ones in the past.
Okay.
Fair enough. And then on the question, the prior caller just asked about on margins. I think historically there is some expectation that you had some contracts that were much higher margin that had been locked in and you had a one-time reset option and those contracts were expected to roll off. I can't remember if it was 2023, 2024, 2025, and that therefore there would be some kind of natural decline in margins. But it hasn't really shown up. So is that the demonstration you has done a really good job of locking in new higher margin contracts? Or is that that there has been a slight decline, but that's it.
That's all we can expect as you from a 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. And those are predominantly legacy based contracts with higher priced suite terms as well as margins.
So we will anticipate those to continue to roll off in the future. And as you noted, I mean and Amir earlier, as we contract with customers, we do get favorable conditions based upon where market prices are today. So margins have been favorable based upon where market conditions are in the current year and also on the market commodity pricing curve that currently exists. That reflects those higher pricing mechanisms as well. So I would anticipate that to your point that we will see higher margin for some of the recent sales as well as the legacy ones, some 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 this the lumpy uranium sales right now, and historically, the expectation on those that would be that they'd be very low margin.
But is it fair to assume that the margins were a little better than it's been historically in Q4, given the run-up in uranium prices during the quarter, that would be an accurate assessment?
Yes.
Okay.
Fair enough. I'll turn it over to.
Thank you.
Thank you.

Operator

(Operator Instructions)
With no further questions in the queue. I would like to turn the conference back over to you for closing remarks.

Amir Vexler

Thank you, operator. This will conclude our investment 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.