Centrus Energy - Q2 2023
August 4, 2023
Transcript
Operator (participant)
Greetings, welcome to Centrus Energy second quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should 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, Vice President, Corporate Communications. Thank you, Mr. Leistikow. You may begin.
Dan Leistikow (VP of Corporate Communications)
Good morning. Thanks for joining us. Today's call will cover the results for the second quarter of 2023, ended June 30th. 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 a 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 the 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 of Centrus is strictly prohibited. Thanks for your participation.
I'll now turn the call over to Dan Poneman.
Dan Poneman (President and CEO)
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. 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 toward 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 centrifuges, 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's Atoms for Peace speech before the United Nations, which set the United States on the path toward global leadership in 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 two of our contract, a full year of production at the annual rate of 900 kilograms of HALEU per year. While phase one of the contract requires a 50/50 cost share, starting in phase two, 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, three tablespoons of which could support one 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 nine 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 nine different HALEU fuel reactor designs and critically needs 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.... 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, 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 17th, 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 HALEU production. With support from the Department of Energy, TerraPower is building a commercial-scale Natrium reactor in Kemmerer, Wyoming. Under this MOU, our two companies are evaluating how to expand our capacity in Piketon so that we can deliver HALEU in the quantities and on the timeline necessary to support the 2030 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 Strawbridge (CFO and SVP)
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 gross profit in all four quarters, but more than 90% of that came in 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 book the revenue and cost of sales in that quarter, which also 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 a 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 customers' 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. 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.
Dan Poneman (President and CEO)
Thank you, Philip. This year, 2023, is the year of decision. There's 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 HALEU 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 America's enrichment capacity in decades.
Meanwhile, in late July, the Senate approved an amendment from Senators Barrasso, Manchin, and Risch to the National Defense Authorization Act that authorizes and directs the Secretary of Energy to jumpstart construction of new domestic enrichment by purchasing significant quantities of low enriched uranium and HALEU. The NDAA is considered must-pass legislation, it's typical 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 one of only 8 that were adopted by individual votes, and it passed by an overwhelming margin of 96 to 3. This was a historic vote, worthy of the legacy of President Eisenhower's 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 four years, has decided to retire as of December thirty-first.
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 interests of our shareholders, we will sorely miss his leadership and wise counsel. Fortunately, in Kevin Harrill, the company has found a worthy successor to Philip, and as Chief Accounting Officer for the past two 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 1st, and Philip will step into the role as an advisor to me and to the board of directors until his 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. With that, we'll take your questions. Operator?
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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your questions 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 poll for questions. The first question comes from the line of Rob Brown with Lake Street Capital Markets. Please go ahead.
Rob Brown (Managing Director, Senior Research Analyst and Director of Research)
Good morning.
Dan Poneman (President and CEO)
Good morning, Rob.
Rob Brown (Managing Director, Senior Research Analyst and Director of Research)
Just wanted to clarify on the DOE draft proposal, what's sort of the draft RFP, what's sort of the timeline on getting the next steps there, and you see at this point? In general, what's sort of the kind of methodology that the DOE is starting to coalesce around in terms of the support? Are these sort of commitments to buy materials, or are they capital commitments upfront, or how is it sort of shaking out at this point?
Dan Poneman (President and CEO)
Rob, as always, it's a great question, but I'm pretty consistent in 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 timeline, 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. In terms of the actual process, as you know, they issued this draft RFP, I think it was around June 6th. We had to get our comments in around July 6th. Typically, they take 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 looked 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 piece. There's 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, when the Department will act, because that's ultimately up to them.
Rob Brown (Managing Director, Senior Research Analyst and Director of Research)
Okay. Yeah, thank you for the color, and, and I understand it's, it's hard to predict, the sort of government steps. On the, on the current contract you have, your phase two, 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?
Dan Poneman (President and CEO)
No, we, we, we can do that. The, the way it breaks down, basically, this first phase, phase one, this very modest 20 kilogram production, that's basically to show that it works, right? Of course, the significant thing about that is that is the only portion of this contract that is cost share. Once we're past phase one and into phase two, and the 16 machines are indeed sufficient, Rob, to produce the 900 KGU that are pledged under that contract, then those will operate, and they can produce that quantum in, in that amount of time.
Obviously, as, 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 gonna do that and to put out these additional tranches that come out in chunks of, like, 120 machines each. Each one of those cascades can, in turn, produce 6 metric tons per year, and therefore, that's assuming 4.95% feedstock. Therefore, within 42 months, if you add the 1 ton, it's effectively 900 kilograms dropped to a ton, plus the 6 tons, that would be 7 tons, and then we could put another cascade on, another 120 machines every 6 months thereafter.
Within 48 months, just on the new build, we could have effectively 12 metric tons of capacity production.
Operator (participant)
Thank you. Next question comes from the line of Joseph Reagor with Roth MKM. Please go ahead.
Joseph Reagor (Managing Director and Senior Research Analyst)
Hey, Dan and Phil and team. Thanks for taking the questions.
Dan Poneman (President and CEO)
Hey, Joe. Good morning.
Joseph Reagor (Managing Director and Senior Research Analyst)
Morning. Question on how you guys are handling filling out the order book in, like, the out years. With, you know, the possibility that the, the U.S. government, in some facet, eventually bans the purchase of enriched or unenriched uranium out of Russia, you know, how, how do you in the utilities, you know, I guess, look at longer-term contract signing? Is there a finite time you're sticking within? You know, are you guys signing beyond that, but with, you know, a caveat that if something happens there, the, the contract is voided? You know, like, what do you guys do there?
Dan Poneman (President and CEO)
Well, Joe, of course, we can't get into specific contract terms, on one hand. On the other hand, the first thing that must be said is there is a universal recognition that given that Russia accounts for 46% of the world's installed base, that it is an urgent priority, an urgent priority to build new capacity. 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. Everyone also recognizes that it'll 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.
Frankly, you know, those, those sources are limited, and without Russia, if Russia were, in fact, not any longer to be participating or participating at the same level, it will put, obviously, extreme pressure on those, on those supplies. We're 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've found around the market. Of course, we're very focused, like a laser beam, on putting additional productive capacity into the market.
Joseph Reagor (Managing Director and Senior Research Analyst)
Okay, fair enough. Then, on the uranium sales in the quarter, traditionally, your guys' uranium sales have had, let's call it low single-digit margins, you know, 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 you know, the size of it and the higher uranium prices? Or, you know, was it still in that, you know, lower single-digit range?
Dan Poneman (President and CEO)
Well, yes. You're exactly right, Joe. I mean, we did have a good uranium sale. From a, from a margin perspective, it was slightly more. remember, this uranium, and that's not our main business, it's a byproduct of us selling SWU. what we do is when we sell it, we sell it at market. Market was going up slightly, but what we show is, you know, at minimal margin, but it's because it's a byproduct of SWU.
Operator (participant)
Thank you. Next question comes from the line of Richard Fels with Private Investor. Please go ahead.
Speaker 7
Good morning.
Dan Poneman (President and CEO)
Good morning. Hey, Richard.
Speaker 7
Hi, thank you. Obviously, everyone is happy that the trend of where Centrus is going. I have two questions. I'll, 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 a professional research staff to do this work? 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, you know, you care to discuss it. I'm assuming you're buying just short-term U.S. treasuries, but that should add another $8 million-$10 million a year of interest? Those are the two questions I have.
Dan Poneman (President and CEO)
Okay, I'll, 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. For-- 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. 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 thing financed.
We, as, as I say, we, we are not really a research organization. We're more an operational organization. Could you take the other?
Philip Strawbridge (CFO and SVP)
On the interest, first of all, is we have a little over $200 million on our balance sheet, and, you know, we're very conservative in what we invest in. I'm gonna let Kevin Harrill talk about that. Kevin, you want to talk about where it's at?
Kevin Harrill (Controller and Chief Accounting Officer)
Yeah, 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 three months ended June 30, and $4.1 million for the six months ended June 30, 2023. That's where we actually you would locate it on the income statement and the financial statements. 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.
Speaker 7
Sure. That's the $8 million-$10 million that I estimated that you would be earning.
Philip Strawbridge (CFO and SVP)
That's exactly right.
Speaker 7
That makes sense. No staffing issues at all to help facilitate the contracts?
Dan Poneman (President and CEO)
No, that's a different question. You asked about research, we don't do it.
Speaker 7
I phrased it wrong.
Dan Poneman (President and CEO)
Yeah, maybe.
Speaker 7
I understand.
Dan Poneman (President and CEO)
Let me, let me, let me, let me go where I think you wanna go.
Speaker 7
Yes.
Dan Poneman (President and CEO)
The whole industry is challenged when it comes to human resources. Let me put, let me put this in some context for you. There's a very interesting, you probably have read it, commercial liftoff report published by the U.S. Department of Energy, I believe it was in March. They said to meet our national, global, targets to reach net zero by 2050, even with a very robust build-out of wind and solar renewables, we're gonna need 200 gigawatts of new nuclear power. To put that in context, we have about 90 gigawatts today.
Speaker 7
Mm-hmm.
Dan Poneman (President and CEO)
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. 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. I don't mean to seem glib about that at all. It's a challenge, but I, I guess I'd make one other point, which is we have been very, very fortunate to partner with some really outstanding sources of good talent.
The Navy continues to be a just a phenomenal training ground for the highest quality candidate that we could search for. 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 North America's Building Trades Unions, the International Brotherhood of Electrical Workers, the United Steelworkers, and so forth. There's there is a lot of work going on on strengthening and making the that supply chain of human talent more robust. The last thing I'll invite your attention to is a very interesting report from 2017, published by the Energy Futures Initiative, about the ecosystem that exists between a vibrant commercial sector in nuclear and a national security enterprise.
This goes all the way back. I know I've mentioned President Eisenhower twice. This goes back to the 1950s, where Admiral Rickover and President Eisenhower leveraged a big investment the United States made in a nuclear Navy, and used that to spawn the whole domestic commercial industry, and with huge success. They made the Shippingport reactor design available, and little less known, President Eisenhower made, at that time, $1 billion, it would be like worth $10 billion worth of uranium and rich 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 build-out of our capacity.
Operator (participant)
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 (VP of Corporate Communications)
Thank you, operator. This will conclude our investor call for Q2 2023. As always, we wanna thank those listeners online and investors who called in, and we'll look forward to speaking with you again next quarter.
Operator (participant)
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.