Centrus Energy - Earnings Call - Q1 2020

Transcript

Operator (participant)

Welcome to the Centrus Energy First Quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Leistikow, VP Corporate Communications. Please go ahead.

Dan Leistikow (VP Corporate Communications)

Good morning. Thank you for joining us. Today's call will cover the results for the first quarter of 2020 ended March 31st. Here today for the call are Dan Poneman, President and Chief Executive Officer, Philip Strawbridge, Senior Vice President, Chief Financial Officer, Chief Administrative Officer, and Treasurer, and 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 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 of the information that 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. 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 report on Form 10-Q. Finally, the forward-looking information provided today is time-sensitive and is accurate only as of today, May 12th, 2020, unless otherwise noted. This call is the property of Centrus Energy. Any transcription, redistribution, retransmission, or rebroadcast of this 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.

Dan Poneman (Former President and CEO)

Thank you, Dan, and thank you to everyone on the call today. I hope that all of you and your family and friends are staying safe and healthy during this very perilous time for our people in our own country and in the world over. We've instructed our employees company-wide to telework to the maximum extent possible. We're taking a series of other steps to protect those employees who are not able to telework, which includes a portion of our workforce at our secure facilities in Tennessee and Ohio. We will follow local guidance as states begin to lift restrictions and plan to take a mindful approach to bringing employees back in. Through it all, the health and safety of our employees is our paramount concern.

As we discussed on our last call, even as the COVID-19 pandemic has placed an enormous strain on the economy, Centrus is fortunate that the vast majority of our revenue is tied to stable, long-term contracts with large entities like electrical utilities and the U.S. government. We've not had any interruptions in our nuclear fuel deliveries to our customers in the United States or around the world, and we expect that we'll continue to make those deliveries as planned in the months and years ahead. In the first quarter, Centrus reported $45 million in total revenue and net income of $11.3 million. That's a significant improvement over the first quarter of 2019 when we saw a net loss of $20.9 million.

As always, however, I want to caution that our revenues and results tend to vary considerably from quarter to quarter because our customers have annual purchase commitments, not quarterly commitments, and they can take delivery at whatever point in the year they choose. Some quarters have more deliveries than others. Some have fewer. And given market dynamics, most choose to take those deliveries late in the year. Another big variable is the price. As you will recall, prices declined 75% between 2010 and 2018. Since they hit their low point in August 2018, they have subsequently increased by about 30%. Spot sales are infrequent in the nuclear fuel market, so most of our sales revenues in that segment are tied to long-term contracts that were signed over the last several years at differing points along the price curve.

So quarters when you happen to be delivering on a higher price contract can look better than when you're delivering on a lower priced contract, which is why it is the full-year performance that really matters most. Having said that, our positive net income number during the first quarter reflects the fact that we've lowered our overhead, lowered our debt, and lowered our enrichment supply costs. Those lower supply costs on a per-unit basis are principally the result of the price reset provision in our largest supply contract, which took effect last year, along with other steps we've taken to obtain low-cost supply from other sources in the current price environment. We ended the quarter maintaining a long-term order book in our LEU segment valued at approximately $1 billion, which includes approximately $300 million in deferred revenue. The U.S.

Department of Commerce is seeking a significant extension of the Russian Suspension Agreement, potentially extending limits on imports of Russian nuclear fuel past the scheduled expiration of those limits at the end of this year. We are engaging with the U.S. government, industry stakeholders, and others to urge that any potential extension includes sufficient quota to allow all existing U.S. contracts with Russian suppliers of enriched uranium, including our own supply contract, to be fully implemented. Turning to our technical solutions segment, we have continued to execute well on our three-year, $115 million contract with the U.S. Department of Energy to deploy a cascade of our AC-100M machines to demonstrate production of high-assay, low-enriched uranium, which we call HALEU.

To date, we have not experienced delays as a result of the pandemic, but we can't rule out that possibility in the future and will continue to work with the Department of Energy to minimize any possible impact to the cost or schedule of the program. As we've discussed, HALEU is a new kind of nuclear fuel that is not available commercially today but will be needed to power many of the advanced reactor designs that are now under development. It may also be used in the coming years to fabricate advanced fuels for the existing fleet of reactors, allowing improvements in safety as well as in reactor economics. Along these lines, in April, Centrus signed a letter of intent with Advanced Reactor Concepts, or ARC, for the potential future supply of HALEU as ARC works to deploy its next-generation reactor technology in the late 2020s.

While it's non-binding at this stage, this letter of intent shows the fact that there is keen commercial interest in what we believe will be the nuclear fuel of the future. In addition to commercial interest, the U.S. Department of Defense launched a program earlier this year that aims to build and demonstrate a prototype mobile microreactor, which will also be powered by HALEU. While the government has a limited quantity of downblended fuel available to power the prototype, if the U.S. military decides in the future to deploy a significant number of these reactors, they may require a significant volume of HALEU, and pursuant to U.S. non-proliferation commitments, that HALEU would need likely to be what is called unobligated. Essentially, that means that it must be produced from U.S.-mined uranium and then converted to a gas and enriched to greater concentration of the uranium-235 isotope using exclusively U.S.

technology with no foreign components. Centrus has the only deployment-ready domestic technology that is capable of producing unobligated enrichment suitable for national security missions. The material we produce during this demonstration won't be unobligated since the program is geared toward commercial production and the HALEU produced is intended for a civilian reactor demonstration. A few of the legacy components we are using in the demonstration cascade do contain some foreign material, but we could swap those out with identical U.S. components if unobligated enrichment is needed in the future. Of course, we hope that these 16 machines will be the first of many, and we have already identified the domestic supply chain so that all of those machines can produce unobligated enrichment if needed. Now, for more details on the quarterly financial results, I will turn the call over to Philip.

Philip Strawbridge (Former Senior VP, CFO, Chief Administrative Officer, and Treasurer)

Thank you, Dan, and good morning to everyone on the call. For the first quarter 2020, we had total revenue of $45 million, including $30.7 million from our LEU segment. Revenue from the LEU segment decreased $4.4 million, or 13%, from the same period in 2019. The revenue from sales of SWU increased 148%, reflecting an increase in the average SWU selling price and partially offset by that 7% decline in sales volume. As Dan mentioned, the prices and volumes can vary significantly from quarter to quarter depending upon how our customers choose to time their annual purchase commitments over the course of the year. Our technical solutions segment revenue increased significantly over the same period in 2019 as Centrus began work on the HALEU contract that Dan talked about. Cost of sales for technical solutions segment is up $6.2 million compared to the corresponding period in 2019.

This reflects the mix of technical solution work performed in each of the periods, including work performed under the HALEU contract in the current period. Cost of sales for LEU segment declined by $25 million, or 65% in the first quarter 2020 compared to the same period in 2019, reflecting declines in SWU and uranium sales volumes and a decline in the average cost per SWU. There were no uranium sales in the three months ended March 31st, 2020. As Dan has noted, in recent years, our revenue can vary significantly from quarter to quarter depending upon the timing when the customers elect to take their annual deliveries and other factors. Therefore, our operating results and cash flows can fluctuate significantly from quarter to quarter and year to year.

Operating results for the three months ended March 31st, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31st, 2020. Now, with that, I'm going to turn it back over to Dan.

Dan Poneman (Former President and CEO)

Thank you, Philip. Before we close, I would like to highlight one other important development from last month, which was the report released by the White House Nuclear Fuel Working Group. I've been working on nuclear issues since 1975, and in thinking back over the past 45 years, I cannot recall a more thorough and wide-ranging statement of American policy on the nuclear fuel cycle. The report makes a strong call to restore the nuclear leadership that the nation has lost since that time and provides a strong basis upon which to steer our future efforts. While many of the recommendations were focused on the mining and conversion steps of the nuclear fuel supply chain, we were pleased to see the explicit support for the HALEU demonstration program and, more broadly, for restoration of U.S.-based uranium enrichment as a critical element of restoring America's lost nuclear leadership.

Specifically, the report notes the national security importance of restoring America's ability to produce unobligated enriched uranium, a material that, as I mentioned earlier, is enriched using technology that is free from any peaceful use obligation imposed by foreign governments. With the only domestic centrifuge technology that is deployment-ready, Centrus can play a major role in helping the U.S. government meet this requirement in the years ahead. We also welcome the report's focus on promoting American leadership in advanced reactor technologies and advanced nuclear fuels, a goal that enjoys strong bipartisan support. The simple reality is that our country cannot expect to be competitive in the global market for next-generation reactors and fuels unless and until we can develop an assured domestic source of high-assay, low-enriched uranium, or HALEU. Centrus is proud to stand at the forefront of that effort.

In addition to the commercial reactor market, the Nuclear Fuel Working Group report encouraged efforts by the Department of Defense to develop microreactors that can be deployed to support our troops in the field and to provide reliable, resilient power to key military installations. The Department of Defense effort to design and build a prototype mobile microreactor within three years reinforces the urgency of our mission since one of the department's design requirements is that the reactor must run on U.S. origin HALU. The men and women of Centrus Energy, many of whom have dedicated their whole professional lives to our enterprise, and some of whose parents and grandparents did too, going all the way back to the Manhattan Project, take pride in the role this company and its predecessors have played in supporting America's national security requirements and fueling the peaceful use of the atom around the world.

I've never been more proud of them or more optimistic about what we can achieve together in the months and years ahead. And, Operator, with that, we would be happy to take any questions at this time.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we pull for questions. There are no questions at this time. I would like to turn the floor back over to Dan Leistikow.

Dan Leistikow (VP Corporate Communications)

Thank you. Since there are no questions at this time, this will conclude Centrus's first quarter 2020 investor call. I want to thank our investors and others who've joined us today on the call or have been listening online, and we look forward to speaking with you again soon.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.