Centrus Energy - Earnings Call - Q3 2021

Transcript

Operator (participant)

Greetings and welcome to Centrus Energy Third Quarter 2021 earnings call. At this time, all participants are on a listen-only mode. A 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. You may begin.

Dan Leistikow (VP of Corporate Communications)

Good morning. Thank you all for joining us. Today's call will cover the results for the third quarter of 2021, ended September 30th. Today we have Dan Poneman, President and Chief Executive Officer, Philip Strawbridge, Senior Vice President, Chief Financial Officer, Chief Administrative Officer, and Treasurer, as well as 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 tomorrow afternoon. 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 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, November 11th, 2011, or sorry, November 11th, 2021, unless otherwise noticed. 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.

Thank you for your participation, and I'll now turn the call over to Dan Poneman.

Daniel Poneman (CEO)

Thank you, Dan, and thank you to everyone on the call today. I'd like to acknowledge, especially today, November 11th, our veterans, which is a day that we honor and celebrate the sacrifice and contributions they've made to our nation to keep us safe and secure. And it's something that all Americans strongly owe a debt of gratitude to all of the veterans all over the country and wherever they may be. So Godspeed to all. I'm pleased to report that Centrus Energy had a strong and profitable third quarter of 2021. We generated a total revenue of $91.3 million and earned net income of $42.1 million for the quarter. Our cash balance as of September 30th was $171 million, putting us in a strong position as we go forward. Our LEU segment continues to perform very well and deliver strong margins.

This reflects not only success we have had on the sales side, but also the fact that we were able to diversify and extend our supply base and take advantage of historically low enrichment prices a few years ago to lock in affordable enrichment supply through the late 2020s. As you may recall, at the beginning of 2019, a market-based price reset took effect in our largest supply that reduced our costs and significantly improved our margins. While our costs are lower, the uranium enrichment market has been steadily recovering, with published price indicators for enrichment rising 63% compared to the low point in August of 2018.

We've been steadily winning new sales to maintain the strength of our long-term order books for uranium enrichment, which is currently valued at $1 billion in sales through the end of the decade, including approximately $320 million in deferred revenue and advances from customers. We have also made good progress in our effort to pioneer production of high-assay low-enriched uranium, or HALEU, as we call it, a next-generation nuclear fuel that will be needed for most of the advanced reactor designs that are currently under development and may also be used in the existing fleet of reactors. Under our three-year HALEU contract with the U.S. Department of Energy, we have finished assembling the centrifuges for the generation plant and construction of the support systems is well underway.

We completed two additional milestones this quarter, meaning nine of the 14 milestones in the contract have been completed on or ahead of schedule. As you may recall, in June, we secured approval of our license amendment application from the U.S. Nuclear Regulatory Commission, making the American Centrifuge Plant in Piketon, Ohio, the first and only U.S. enrichment facility licensed by the NRC to produce HALEU. We are proud to have achieved this critical milestone on the road to the restoration of American nuclear leadership. While Centrus has managed to keep our own construction work on track throughout the pandemic, as we have previously noted, the pandemic has affected some of us, which has created significant challenges. The COVID-related challenges include increased delays from vendors and higher costs. We are working with the department to minimize the impacts and to address these cost increases as we go forward.

We expect that the centrifuge cascade will be completed and ready to begin demonstrating HALEU production next year. At that point, subject to the availability of funding and/or off-take agreements, our goal is to scale up the plant. While the initial capacity will be modest and dependent on demand signals from potential customers, the Piketon facility is large enough to accommodate whatever level of production the market can support. As we look to the longer term, in addition to commercial requirements for fuel enriched to various levels between 4%-20% uranium-235 content to support both existing and advanced reactors, there are also a number of U.S. government requirements for enriched uranium that Centrus is positioned to satisfy. Longstanding U.S. policy and non-proliferation agreements prohibit the use of foreign uranium enrichment technologies for national security missions.

The last U.S. technology-based enrichment plant was built in the 1950s and shut down in 2013. For the first time since 1945, the United States lacks any domestic enrichment capability that can be used for security. For now, the only way to meet those requirements is to draw down the country's finite stockpile of highly enriched uranium left over from the Cold War, but ultimately, a new domestic technology enrichment capability will be needed. Centrus's AC-100M centrifuge is the only deployment-ready technology that can meet these requirements today. As I said, this was another strong quarter for Centrus, as measured not only by our revenue and profit, but also by the steady progress we are making toward resuming our status as an enricher and pioneering a new market for advanced nuclear fuels. Now, for more details on the quarterly financial results, I will turn the call over to Philip. Philip?

Philip Strawbridge (CFO)

Thank you, Dan. Good morning, everyone. As Dan mentioned, for the third quarter of 2021, we had total revenue of $91.3 million and achieved a net profit of $42.1 million. Revenue in the current quarter included $43.5 million related to a settlement of the company's claims for reimbursement for certain pension and post-retirement benefits incurred in connection with a past cost-reimbursable contract performed at the Portsmouth GDP. Revenue from the LEU segment increased $13.3 million compared to the same quarter in 2020. Our cost of sales was $4.1 million higher in the third quarter compared to last year, largely reflecting increases in SWU sales volume, partially offset by decreases in the average SWU unit cost.

Gross profit for the LEU segment increased $9.2 million in the three-month period and $10.6 million in the nine-month period, primarily due to increases in SWU sales volume and decreases in the average SWU unit cost, partially offset by decreases in the average SWU sales price. Those of you who have participated in these calls before know that we've set our revenues and margins vary a lot from quarter to quarter, but it's the annual performance that matters the most. In our LEU segment, which represents the majority of our revenue, our customers typically have multi-year contracts that include an annual purchase obligation but not a quarterly purchase obligation. The customer decides what month to take their annual purchase commitment, and that's in that quarter that we record the revenue for the customer's contract.

Some quarters look worse because we have fewer deliveries, while others look better because we have more deliveries. Another source of variation is the fact that some contracts were signed when prices were high or higher than they are today, and others were signed when prices were lower. So a quarter can look better or worse depending upon the price points of that particular contract that we're delivering for the quarter. Our technical solutions segment revenue increased by $44.14 million in the third quarter of 2021 as compared to the same period in 2020. As I mentioned previously, revenue in the third quarter of 2021 included a one-time payment of $43.5 million related to a settlement of the company's claims for reimbursement for certain pension and post-retirement benefit costs incurred in connection with a past cost-reimbursable contract.

Costs for the sales of this segment increased $3.3 million in three months ended September 30th, 2021, compared to a corresponding period in 2020, largely reflecting the increase in the contract work performed. Now I'm going to talk a little bit about our SG&A costs. Our total SG&A increased $2.3 million in the three months ended September 30th, which is mostly the result of $2.2 million increase in incentive-based compensation expense as the result of our higher stock price. However, for the nine-month period ending in September 30th, SG&A decreased by $600,000 compared to the corresponding period in 2020. Consulting costs increased $300,000 for the quarter and decreased $3.3 million for the nine-month period. As far as cash, we ended the quarter with a strong balance of $171 million, putting us in a good position going forward.

One subsequent item of note that occurred after the quarter was in October, we launched a tender offer to purchase the remaining shares of our preferred. This was initiated to continue our efforts to clean up the balance sheet. That tender offer does not close until November 18th, so we won't be providing any further detail until after that close. Now I'm going to turn the call back over to Dan.

Daniel Poneman (CEO)

Thank you, Philip. Before we get to your questions, I'd like to speak to the broader picture when it comes to deployment of the next generation of carbon-free nuclear power plants. A prominent feature in that picture was the 2020 launch by the U.S. Department of Energy of the Advanced Reactor Demonstration Program. In that program, the department selected 10 reactor designs for funding. Nine of those 10 designs are expected to require HALEU, including the two multi-billion dollar multi-year awards to X-energy and TerraPower to support construction of commercial-scale HALEU-fueled reactors by 2027. On August 10th, the U.S. Senate approved a $1 trillion infrastructure package on a strong bipartisan vote of 69 to 30.

That legislation, which was approved in the House late last Friday and will likely be signed into law by President Biden in the near future, provides a $2.5 billion appropriation over four years to the Advanced Reactor Demonstration Program, providing critical funding and momentum to the two large demonstration reactor projects on their road to successful construction and deployment. This investment is a clear sign of the growing and widespread support in this country for the advanced nuclear industry and the role nuclear will play in the fight against emissions and climate change. Another major development since our last call occurred in October when the United States Air Force announced plans to deploy a micro-reactor by 2027, selecting Eielson Air Force Base in Alaska as the site and outlined a detailed timetable for the procurement.

The Air Force plans to issue a draft request for proposal, or RFP, this fall and a final RFP in February, with the goal being to select a vendor by late 2022, begin construction in 2025, and enter commercial operations in 2027. If the effort is successful, it could lead to a larger-scale deployment of micro-reactors at other military installations and potentially contribute to a large demand for HALEU. This is in addition to a separate effort underway called Project Pele, which is being funded by the Pentagon Strategic Capabilities Office and aims to deliver a prototype HALEU-fueled mobile micro-reactor within three or four years. The upshot of all of this is that there is growing consensus involving industry, government, non-governmental organizations, academia, and other stakeholders about the importance of deploying a domestic source of HALEU and a growing sense of urgency in achieving that goal.

We intend to provide the solution that our industry, our nation, and our climate all need. And operator, we would be happy to entertain any questions at this time.

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you'd like to ask a question, you may press star one on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star two 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 key. Our first question comes from the line of Rob Brown with Lake Street Capital Markets. Please proceed with your question.

Robert Brown (Analyst)

Good morning.

Daniel Poneman (CEO)

Morning.

Robert Brown (Analyst)

First question is on kind of the pricing trends in the market around uranium and SWU, maybe just give some color on how that's impacting your business and driving some of the market activity in terms of placing orders.

Daniel Poneman (CEO)

As you know, Rob, our business on the enrichment side is a different business than the specific trading in the underlying uranium commodity, and our contracts are typically let on a very long-term basis with a lot of advanced notice. It's not directly tied, point one. Point two, as you know, kind of the nature of the enrichment business is that it's typically the customer, the utilities that provide the uranium. So they are the ones who are facing that aspect of the market. Third point, however, there is obviously kind of an algorithm. There's a relationship as utilities make their decisions on their own fueling requirements because there is some substitution effect between uranium and enrichment. Obviously, as uranium goes up in price, it's more attractive to use less of it, which makes it more attractive to use more separative work, etc., etc.

It's a highly complex algorithm and one that does not really affect our day-to-day activities. But overall, when you kind of look on a secular basis over time, the rising market in natural uranium is part of a broader trend that I mentioned in my remarks of growing recognition of not only the importance of nuclear, but a growing set of investments in advanced nuclear, a lot of interest in extending the life of the current fleet, a lot of interest in investing in new reactors, not only in this country, but really quite robust interest on the international scene as well, so sorry, it's a slightly longer answer, but it's kind of a complex relationship.

Operator (participant)

Our next question comes from the line of Joseph Reagor with Roth Capital Partners. Please proceed with your question.

Joseph Reagor (Analyst)

Morning, guys. Thanks for taking the questions.

Daniel Poneman (CEO)

Morning, Joseph.

Joseph Reagor (Analyst)

Morning. So I guess my most important question would be, I know you guys don't give quantitative guidance, but any qualitative commentary you can give us on expectations for next year based on what you know the annual requirements are for deliveries?

Daniel Poneman (CEO)

Well, I would say I'll give a top line thing to supplement. We expect modest increasing in revenues and relatively steady margins. But beyond that, Philip, I don't know what more you would wish to add.

Philip Strawbridge (CFO)

Yeah, Joe, as you know, we did give some guidance last year, and we gave guidance for 2021 and 2022. And so that guidance, from our perspective, still holds true. And that guidance is really attributable to the LEU segment. And what we said was just what Dan said. We expect that revenue increased slightly year to year, and that margins would hold approximately the same. So we still think that's good. As Dan mentioned early on, we've had good sales, so we see that the market is still very good. So we hope we'll get that guidance.

Joseph Reagor (Analyst)

That excludes one-time items, right?

Philip Strawbridge (CFO)

That's correct. That's correct.

Joseph Reagor (Analyst)

Thanks.

Operator (participant)

As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Stephen Gengaro with Stifel. Please proceed with your question.

Stephen Gengaro (Analyst)

Thanks. Good morning, gentlemen.

Daniel Poneman (CEO)

Morning.

Stephen Gengaro (Analyst)

Just curious, sort of from a big-picture perspective, when we look at U.S. electricity generation, we all hear how bad hydrocarbons are, necessary but bad right now. How do you think nuclear evolves over the next decade, say? I mean, just from a big-picture perspective, any thoughts you could share on kind of the importance of it relative to other renewables? And I mean, obviously, it's low carbon, but what are your thoughts on those fronts?

Daniel Poneman (CEO)

It's a great question. It's an interesting relationship, and it's an evolving relationship. Look, if you look historically, coal for decades provided one-half of the electricity in the United States. About 20% came from nuclear, about 20% from natural gas, and the other 10% really mainly from hydro. In more recent years, obviously, wind and solar have been coming on strong. The whole secular decline of the coal industry has now, and the rise of natural gas has obviously squeezed coal down to, I think, about 20%. Nuclear, even though the capacity additions have really slowed down, continues to contribute about one-fifth of the overall mix. Why? Because even as wind and solar build up, their capacity factors are just not at all in the same ballpark as nuclear, which the industry has worked very hard to get capacity factors in excess of 90%.

That 20% figure, even though the installed capacity has shrunk as an overall share, has held strong because of the basically 92.4% contribution it makes. And oh, by the way, more than half of the carbon-free power of the country comes from that nuclear segment, which relates to the other part of your question. As wind, and this has been written up extensively in the analytical literature, which we could point you to, but wind and solar need to have firm dispatchable power to maximize their contributions and to optimize it precisely because, A, they are intermittent. You don't get solar when the sun's not shining. You don't get wind power when the wind's not blowing. And by the way, we're not talking about bridging two or three hours or maybe not even a couple of days. You're talking about seasonal shifts, right?

And so in other words, to backstop that power, you need firm dispatchable power. And nuclear is the only significant carbon-free way to do that because there are a lot of people who have been talking about the possibility of batteries, but batteries are just not there yet in terms of the level of capacity that's required and the price point, quite frankly. So in some academic literature, you'll find that if you wanted to actually substitute all batteries and renewables and try to get the job done that way, you'd need, I think, six to eight weeks of battery storage, and we have only 43 minutes collectively in the nation. So nuclear is a very good complement to renewables, and that's a trend that you're seeing. And by the way, people are leaning into that.

If you have been reading about the Natrium Reactor being developed by TerraPower, they have an ability to basically, while they are running 24/7 for those hours of the day that the grid does not need that power, they can heat up salt. And that salt is actually a form of energy storage that can itself backstop the deployment of more renewables. So again, I don't mean to be too long-winded, but the bottom line is I think what you're seeing as a secular trend is growing recognition that nuclear has really an indispensable role to play as a complement to renewables and in the overall effort to decarbonize the power sector. Very ambitious goal the president set forth to decarbonize all power generation by 2035. And of course, everyone's trying to get to net zero by 2050.

Whether you ask the analysts at the International Energy Agency or the scientists at the Intergovernmental Panel on Climate Change how to get to net zero, all agree that you need a significant expansion of nuclear energy.

Operator (participant)

Our next question comes from the line of Joseph Reagor with Roth Capital Partners. Please proceed with your question.

Joseph Reagor (Analyst)

Hey again, guys. Question on the accounting treatment for this one-time settlement. So I'm just trying to understand. You guys treated it as revenue, but it seems like it flowed through the cash flow statement as if it was a non-cash item. So just any additional commentary you can give us as to how that worked exactly? Did you guys ever actually physically get the cash, or is it a non-cash item? Or did you have to apply it to pension? Or exactly how did that work?

Philip Strawbridge (CFO)

Yeah, Joe, I'll jump in here. The settlement, the way it's structured, was that it was for specifically the pension and post-retirement benefits. And so the government said that we had to apply those directly. So we did get the cash, but we turned around and put it straight into the pension plan. And then we set up a trust for the post-retirement plan piece. But the bottom line is that that's why you don't really see the cash. So you can look at it as a non-cash type of event. That said, if you think about it from a long-term perspective, this is positive, right? Because we're paying down those, we're putting additional money into the assets, right, associated with the pension plan, which ultimately means that we would have it's going to reduce the amount of cash we'd ever have to put in.

So it's a long-term positive, but you're exactly right. The cash doesn't. Does that answer your question, Joe?

Operator (participant)

As a reminder, ladies and gentlemen, it is star one to ask a question. There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Dan Leistikow (VP of Corporate Communications)

Thank you, operator. This will conclude our investor call for the third quarter of 2021. As always, we want to extend our thanks to our listeners online and those who called in. And we look forward to speaking with you again next quarter. Thank you.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.