Centrus Energy - Q4 2023

Transcript

Operator (participant)

Greetings and welcome to the Centrus Energy 4th quarter 2023 earnings conference call. At this time, all participants are on 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 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lindsey Geisler, Director of Corporate Communications. Thank you. Please go ahead.

Lindsey Geisler (Former Director of Corporate Communications and Executive Administration)

Good morning. Thank you all for joining us. Today's call will cover the results for the 4th quarter and full year of 2023, ended December 31st. Today we have Amir Vexler, President and Chief Executive Officer, and Kevin Harrill, Chief Financial Officer. Before turning the call over to Amir Vexler, 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 4th quarter and full year 2023 on Form 10-K later today. All of our news releases and SEC filings, including our 10-Ks, 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 information 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 reports on Form 10-Q. Finally, the forward-looking information provided today is sensitive and accurate only as of today, February 9th, 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 express written consent of Centrus is strictly prohibited. Thank you for your participation, and I'll now turn the call over to Amir Vexler.

Amir Vexler (President and CEO)

Thank you, Lindsey, and thank you to everyone on the call today. I've 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 us more. As 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 chains, the need for a new American source of uranium enrichment has never been clearer. And now that Centrus has proven enrichment operations 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, Centrus achieved $320.2 million in revenue, the 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. 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 SWU and uranium. At the same time, our team won $189 million in new sales contracts and commitments last year, sales that included deliveries and revenues generation through 2030. This was also a big year for our technical solutions segment. We completed phase one of the HALEU 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 HALEU, 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 HALEU we can produce as fast as we can produce it.

Indeed, the Department of Energy has made a $ multi-billion commitment to support deployment of HALEU-fueled reactors, while the Department of Defense is developing HALEU-fueled microreactors that could support our troops around the world. Right now, the Piketon cascade is the only source of freshly enriched HALEU in the Western world. We are proud to be in position to support these vital missions and deliver real value to taxpayers. Phase two calls for us to operate a cascade for a year and deliver the Department of Energy 900 kilograms of HALEU. 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 is subject to the availability of congressional appropriations.

Under the contract, the department is responsible for providing the HALEU storage 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. The centrifuges will continue to operate, but the quantity of HALEU we are able to withdraw 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 a 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 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. 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 load of uranium at incredible speeds, 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 roughly the size of the Pentagon: hundreds of thousands of sq ft of floor space, 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 HALEU for advanced reactors is right there and waiting. Like any important and worthwhile endeavor, it will not be easy. Deploying enrichment capacity for LEU or HALEU at scale is a capital-intensive exercise, which is one reason why the rest of the world's 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 investment, 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 vital national interests. 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 on 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 a first step, the Department of Energy released an RFP last month to begin purchasing HALEU, 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 enricher in the marketplace, especially since we could offer the fastest pathway to large-scale HALEU production.

In addition, members of both parties 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't agree on much, but they agree on this. 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 HALEU. To provide funding for that effort, the administration proposed $2.2 billion as part of a supplemental funding request. Fiscal year 2024 energy and water bill adopted in the House included a $2.4 billion, while the Senate version includes $800 million. Just this week, the Senate included $2.72 billion for domestic enrichment on a 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. Centrus 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 (Executive Financial Advisor)

Thank you, Amir. Good morning, everyone. Centrus 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 and 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 marketing 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 SWU 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 solution 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 one-time expense of $21.3 million recognized in 2022, which represented the company's portion of its anticipated cost share under phase one. 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 31st, 2022. This action resulted in a $28.6 million gain for the company in the fourth quarter, which is reflected in the non-operating 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 (President and CEO)

Thank you. As Kevin just outlined, 2023 was a tremendously successful year. I came to Centrus because I believe it is essential for the United States to restore a 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. It 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 wasn't the fault of any one party or administration. It was a gradual erosion that unfolded over decades. What matters now is that we come together and fix it.

Centrus is working closely with the Department of Energy, both parties in 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.

Operator (participant)

Thank you. 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 question from the queue. For participants choosing speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow-up question, and then re-queue for additional questions. Our first question is from Alex Rygiel with B. Riley Securities. Please proceed.

Speaker 6

Hi. Good morning. This is Actually, Min on for Alex. Want to welcome you, Amir, and look forward to building a relationship here going forward. But congratulations on a really strong year. So it sounds like phase two is set to be completed by November 2024 despite delivering less than the 900 kilograms of HALEU. Do you have any sense for the timing of phase three, or just any updates on if that is moving forward?

Amir Vexler (President and CEO)

Yeah. Good morning. Thank you, Ashley. I appreciate the kind words and well wishes. Your question is about phase three of the HALEU operations contract, as I understand it, and you're specifically asking if we know whether the government will utilize its options under the contract. Obviously, if that's the question, I have no ability to speculate that and guess that. That is at the government discretion. It's their option. All I can say is we've performed under the contract very well. I think our performance has been noted and well regarded. But at the end of the day, phase three is their option.

Speaker 6

Okay. Just a quick question about your pension obligation. It looks like you transferred the union retirees. What are your plans for the rest of your pension obligation and kind of timing?

Kevin Harrill (Executive Financial Advisor)

Yeah. I'll field that question, Min. Thanks for the question, and good to talk to you again as well. So we're 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 had been evaluating in the third part of last year, the third quarter 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 regular reviews of what our remaining pensioners 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.

Speaker 6

Great. I'll get back in queue. Thank you.

Amir Vexler (President and CEO)

Thank you, Min.

Operator (participant)

Our next question is from Rob Brown with Lake Street Capital Markets. Please proceed.

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Good morning and congratulations on a strong quarter and year. Also welcome, Amir.

Amir Vexler (President and CEO)

Thank you.

Rob Brown (Founding Partner and Senior Equity Research Analyst)

My question's really on the HALEU contract, the 900 kilograms that remain. I think you will not get to the full number, but maybe just describe to what degree that you can't deliver because of the cylinders and, I guess, what's the economic impact in terms of revenue to Centrus for the year. Does that really flow over to the following year, or how does that work?

Amir Vexler (President and CEO)

Okay. So I think it was communicated in the past as well. I'm sure it has because I think I listened to some of these discussions before. But under this HALEU operations contract, as you know, the DOE is contractually required to provide 5B cylinders that are required to collect the output of the cascade. But they really did not, they had some supply chain challenges that created difficulties for the DOE to secure these 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 for phase two. During the period when the 5Bs are insufficient, the company will not be able to produce the HALEU that we're discussing here.

We will be able to continue operations of the cascade and perform preventive maintenance and other regulatory compliance-type activities over there. We anticipate that the delay in obtaining these cylinders is really temporarily. It's a temporary issue. But as mentioned earlier, we will no longer be able to achieve the 900 kilograms. We really don't expect an economic impact here.

Rob Brown (Founding Partner and Senior Equity Research Analyst)

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 on when responses are due and how the latest RFP differs from some of the other ones that have come through?

Amir Vexler (President and CEO)

There's two requests for proposals that came out. One was for the deconversion, and that's due next week. And there's one that came out later on for the enrichment of HALEU, and I believe that one is due on March the 22nd. And to your question, how is it different, well, it is a long-awaited and anticipated RFP. It is a critical RFP 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, it plays right to our sweet spot, particularly the enrichment part of it, and we intend to be part of it. I hope I answered your question.

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Yeah. Yeah. That's great. Thank you. And if I could just ask one more about the purchase price kind of activity and the margins at this point. What are 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?

Amir Vexler (President and CEO)

Okay. I'm assuming that you are asking about the LEU business?

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Yes. Correct.

Amir Vexler (President and CEO)

Okay. So the question is I'm going to rephrase it to make sure I understand it. You're asking how are the current market prices going to affect margins going forward?

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Yeah. It's really about gross margins going forward, either market prices or contracted prices or the purchase prices on the material you're buying, the supply material.

Amir Vexler (President and CEO)

Yeah. So as you probably know, we have a supply-type contract, and we have contracts in which we sell the material. Both of them have certain parts of the contract that are tied to market, and the market pricing does affect. On one hand, it affects the supply in one way, and the other way, it affects the sale 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, 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.

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Yeah. That's perfect. Thank you. I'll turn it over.

Operator (participant)

Our next question is from Joseph Reagor with Roth MKM. Please proceed.

Joseph Reagor (Managing Director)

Hey, guys. Thanks for taking the question, and welcome, Amir, to the team.

Amir Vexler (President and CEO)

Thank you.

Joseph Reagor (Managing Director)

So I know that we're not going to get a guidance answer here, but maybe a different question. 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'll 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 that puts and takes of kind of the total number of contracts out there.

Kevin Harrill (Executive Financial Advisor)

Yeah. 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, a sales order book of $1 billion, and we've had that trending at that number for multiple years.

I would also highlight the fact that we had $189 million of new sales. 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 into any specifics as it relates to how those would materialize over the next coming years, either for 2024 sales or ones in the past.

Joseph Reagor (Managing Director)

Okay. Fair enough. Then on the question the prior caller just asked about on margins, I think historically, there was some expectation that you had some contracts that were a 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 a demonstration? You guys have done a really good job of locking in new higher-margin contracts, or is that there has been a slight decline, but that's it? That's all we can expect?

Kevin Harrill (Executive Financial Advisor)

No. From the 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 SWU 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 margins for some of the recent sales as well as the legacy ones still rolling off in future years.

Joseph Reagor (Managing Director)

Okay. Is it possible to ask one additional question before I turn it over?

Kevin Harrill (Executive Financial Advisor)

Yes. Absolutely.

Joseph Reagor (Managing Director)

So in the fourth quarter, you guys had some of the lumpy uranium sales, right? And historically, the expectation on those would be that they'd be very low margin. But is it fair to assume that the margins were a little better than historically in Q4 given the run-up in uranium prices during the quarter?

Kevin Harrill (Executive Financial Advisor)

That would be an accurate assessment. Yes.

Joseph Reagor (Managing Director)

Okay. Fair enough.

I'll turn it over. Thank you.

Kevin Harrill (Executive Financial Advisor)

Thank you.

Operator (participant)

As a reminder, to star one on your telephone keypad, we will pause for a brief moment to see if there's any final questions. Okay. With no further questions in the queue, I would like to turn the conference back over to Lindsey for closing remarks.

Lindsey Geisler (Former Director of Corporate Communications and Executive Administration)

Thank you, operator. This will conclude our 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.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.