LEU - AMEX

Greetings, and welcome to the Centrus Energy's Second Quarter 2022 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Leistikow, Vice President, Corporate Communications for Centrus. Thank you, Dan. You may begin.

Good morning and thank you all for joining us. Today's call will cover the results for the second quarter of 2022 ended June 30. Today, we have Dan Poneman, President and Chief Executive Officer; and Kevin Harrill, Controller and Chief Accounting Officer; our Chief Financial Officer, Philip Strawbridge, had a scheduling conflict that prevented him from being on today's call, but he will be available for follow-up calls next week. Dan and Kevin will be taking questions following their prepared remarks. 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 report for the second quarter of 2022 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 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 trans [indiscernible] and accurate only as of today, August 5 2022, unless otherwise noted. This call is the property of Centrus Energy. Any transcription, redistribution, retransmission or rebroadcast of the call in any form without the expressed written consent of Centrus is strictly prohibited. Thank you for your participation. And I'll now turn the call over to Dan Poneman.

Thank you, Dan, and thank you to everyone on the call today. We are happy to report another strong and productive quarter for Centrus. The numbers speak for themselves. $99.1 million in revenue, $60.9 million in gross profit and $37.4 million in net income. We always remind listeners on these calls that a normal feature of our business is that revenues and margins vary widely from quarter-to-quarter based on the timing of deliveries, and that is the annual performance that matters most. But I do think that it's fair to say that these numbers are another example of the continued resilience of our business even in the face of challenges like the pandemic and the changes in the global nuclear fuel market brought about by Russia's invasion of Ukraine. We are continuing to deliver to fuel our customers need and the results our investors expect. I am enormously proud of our team for the work they are doing to navigate a sometimes difficult environment and to help our company grow for the long term. Along those lines, our sales team has been putting up strong numbers. In the first two quarters of the year, we made deliveries of SWU, separate work units and Uranium totaling about $103 million, but we also secured new sales contracts and commitments worth about $135 million. As a result, the total value of our order book has increased over the course of the year and now stands around $1 billion. As I said, the numbers can speak for themselves, but numbers alone don't tell the whole story. The Ukraine invasion brought energy security issues into sharp focus. And while much of the discussion has been around natural gas, Russia is much more dominant when it comes to nuclear fuel with 46% of the world's uranium enrichment capacity. It is an indispensable supplier of low-enriched uranium for existing reactors worldwide and is currently the only source of high assay, low-enriched uranium or HALEU, the advanced reactor fuel that will be required for most of the next-generation reactors now under development. This has contributed to a dramatic rise in market prices for uranium enrichment and a new sense of urgency from policymakers as well as industry participants to support investments in new domestic capacity for both LEU and HALEU. Centrus is uniquely positioned to lead this effort. We have the only deployment-ready U.S. technology that is capable of meeting national security as well as commercial requirements. Our site is already licensed by the Nuclear Regulatory Commission for LEU production and is also the only site in the country that is licensed to produce HALEU. We have long-standing tie utilities around the world and commercial relationships with many of the most innovative companies that are designing the advanced reactors of tomorrow. The HALEU enrichment plant we have been building in Ohio is expected to begin demonstrating HALEU production next year. Subject to the availability of funding and/or off take commitments we can scale that facility up to whatever level of production the market requires, including both HALEU and LEU for commercial as well as government and national security missions. We're pleased that the Department of Energy has issued a request for proposal that is expected to fund the next stage of the HALEU demonstration and potentially support years of operation and production beyond that. This is a competitive solicitation, and we are working hard to demonstrate our capabilities and make a strong case when we submit our bid later this month. This is one part of a broader HALEU availability program that has been established at the Department of Energy to promote the build out of domestic HALEU production infrastructure. Congress provided $45 million in fiscal year 2022. The administration has proposed $95 million for fiscal year 2023, which was increased to $100 million in the energy and water appropriations bill that recently passed the house, while the Nuclear Energy Institute and others in the industry have embraced the proposal for annual funding of $300 million per year. The draft text of the Inflation Reduction Act recently announced by Senator Schumer and Senator Masha include $700 million for HALEU. There have also been media reports that the administration is developing a proposal to make purchases of LEU and HALEU as a way to jump start domestic production. We cannot predict where the legislative process will land, but it is clear that the momentum behind restoring American leadership in uranium enrichment is real, and it is growing. For more of the numbers, let me now turn things over to Kevin Harrill. Kevin?

Thank you, Dan. Good morning, everyone. As Dan mentioned and as we regularly discussed on these calls, there is considerable variability in our revenue and margins throughout the year. The first quarter of this year was relatively subdued, but in the second quarter, we had several LEU deliveries. Our focus is not on what happens in any 1 quarter, but what happens over the course of the year and how that compares to prior years. Again, there are two factors at play here. Most of our revenue in the LEU business comes from multiyear sales contracts we have with major utilities. Under those contracts, customers typically have an annual purchase obligation not a quarterly obligation. The customer chooses which quarter to take their delivery, and we book the revenue in that same quarter. For example, in the first two quarters of the year, Centrus secured more than $135 million in new sales contracts and commitments. These sales include deliveries of SWU and uranium from 2022 through 2026. And those revenues will be recognized in whatever quarter and year they are delivering. Secondly, the prices in our sales contracts vary significantly based upon when they were signed. Published price indicators for enrichment peaked around $165 per SWU pre-Fukushima declined to below $40 by late 2018. And then began a slow but steady rise to around $60 per SWU prior to the Ukraine invasion. Since then, published price indicators have risen to $87 per SWU in the spot market and above $130 in the long-term market. We had contracts in our order book that were signed up and down that price area. Our quarterly revenue will therefore vary depending on both delivery volume and whether those deliveries were on higher-priced contracts or lower-priced contracts. For the three months ended June 30, our total revenue was $99.1 million. In our LEU segment, the volume of SWU sold declines, but the average price of the deliveries increased compared to the same quarter in 2021. This resulted in an overall increase in revenue for the segment. At the same time, our unit cost of sales per SWU also declined, resulting in a gross profit for the segment of $59.4 million for the quarter compared to a gross profit of $18.2 million for the segment in the same quarter in the prior year. In our Centrus Technical Solutions segment, we generated $13.6 million in revenue against cost of sales of $12.1 million. This resulted in gross profit for the segment of $1.5 million. Segment revenues were $3.6 million lower than in the second quarter of 2021. But that was more than offset by a $6.2 million reduction in cost of sales for the segment. Combining the two segments, we earned a gross profit of $60.9 million for the quarter and net profit of $37.4 million. As you may recall, in our annual 10-K filing, we reported an improvement of more than $100 million in the funding status of our legacy pension plan over the course of 2021. This cut our long-term pension liability from $124.4 million at 2020 year-end to just $23.1 million by the end of 2021. That was primarily driven by the strong growth in our pension assets, combined with the impact of a $43.5 million settlement we secured last year with the U.S. government that helped reduce our long-term liabilities for pension and postretirement health benefits. While equity markets are down substantially this year, though the decline in pension assets have been partially offset by a decline in pension liability due to rising interest rates. Ultimately, the actuarial assumptions established at the beginning of the year show a continued improvement in our pension status, which is $16 million remaining of noncurrent net pension liability. We are in a strong financial position going forward with a cash balance of $136.9 million, which includes $21.3 million of restricted cash for financial assurance as of the end of the quarter, and a long-term order book valued at $1 billion as of June 30. With that, let me turn things back over to Dan.

Thank you, Kevin. Before we get to your questions, let me just take a step back to talk about the broader landscape and the changes in the world and our industry that we have witnessed in recent months. There is no doubt that the Ukraine invasion has upended expectations in the global nuclear fuel market and caused government as well as industry leaders focus on their vulnerable supply chains. Since the end of the year, spot prices for SWU have increased more than 50% and long-term prices have doubled. That means we have opportunities to make new sales at much higher prices than we could have just a few months ago. The realization that prices are rapidly increasing has also prompted a number of utilities to accelerate their contracting activity as they work to secure long-term fuel supplies before prices go up still further. At the same time, the overall outlook for nuclear is stronger than it has been in years. More and more countries are embracing the need for nuclear energy as a pathway to reduce carbon emissions and to provide greater energy security particularly as prices for natural gas are spiking. Natural gas prices in the United States have roughly doubled from a year ago. Wholesale natural gas prices for advanced deliveries in the Netherlands which is often used as the benchmark for pricing in the European Union surged to more than €210 per megawatt hour in late July. That's more than 10 times the average price between 2010 and 2020. Governments in Europe have either doubled down on the nuclear program, reverse decisions to retire plants or revive long dormant plants to require new reactors. Even the German government is reconsidering its earlier decision to shut down the remaining three nuclear power plants by the end of this year. Last month, the European Union agreed to include nuclear power in its green taxonomy, a pivotal decision that could promote wider deployment of nuclear energy throughout Europe as a vital tool in the fight against climate change. In California, Governor Nusa recently announced that the state will consider delaying the shutdown of the Diablo Canyon nuclear power plant, which generates more carbon-free electricity than all of the utility scale wind and solar the state has added in the last five years. And Wyoming, a state that gets around 80% of electricity from coal now has plans to replace one of its retiring coal-fired plants with first of a kind HALEU-fueled sodium fast reactor designed by TerraPower and backed by Bill Gates. The International Energy Agency's net zero scenario requires a doubling of the global nuclear fleet by 2050 from 450 gigawatts installed today to 812 gigawatts installed by mid-century. Achieving that growth will be challenging, but with the effect of leadership and strong public-private partnerships, it is doable. Indeed, given the scale and the urgency of the global challenge to prevent catastrophic climate change, failure is not an option. The momentum behind maintaining existing reactors and building new ones is gaining steam around the world, and Centrus is committed to providing an assured source of fuel to support those reactors for decades to come. And with that, we'll now turn to your questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Rob Brown with Lake Street Capital. Please proceed with your question.

Good morning.

Good morning, Rob.

I just want to follow up on your comment about the new sales activity -- how much is the SWU pricing driving that? And sort of what's the pipeline of activity that's still yet to convert? Or is it a lot pulled forward? How is that -- how sort of the rest of the activity out there?

Well, I think, Rob, you have to kind of look in the broad suite of history when as we experienced from 2011 to about August 2018, prices going down, just put yourself in the shoes of a fuel buyer. Why buy today if it will be cheaper tomorrow. And so now that you see the curve having kinked and now moving up. There's really two things. Number one and they're related, obviously. Number one, there is an advantage of buying sooner if it's going to be cheaper, right? And then secondly, because of all of the uncertainty in the supply scenarios, there's just a pure, frankly, straight energy security aspect of this. So people are trying to lock in long-term supplies, it's very important to operate a reaction with a very clear line of sight to your supply chain. So I think those are the factors that are in play. I don't know if that fully answers your question.

That's great. Very helpful. And then just following up on some of your comments about the legislative efforts to increase U.S. supply. I know there's a lot of things happening. How is your sort of view on when these pieces need to start to fall in place and how long it takes to get the supply online once the decisions start to get made?

Well, it would take quite a fine prognosticator to predict the timing of actions of the U.S. Congress on the one hand. On the other hand, I read news reports this morning very promising ones about this mansionsumer legislation, possibly passing over the weekend. Indications I have seen, Rob, and the last person to speak on behalf of the Congress. But I think Speaker Pelosi [ph] would bring folks back promptly to have this addressed. We've seen a lot of support, anticipatory support on the House side. So our hope is that very, very soon indeed, you would have a fully enacted bill that the President would sign in just a very short while from now. And as I've mentioned in my remarks, that's really a game changer right, because it's got $700 million in it for HALEU, and that's exactly the kind of market signal that we've been looking for. It's both -- it's both the market signal, but also it's a very significant investment, right? So beyond that, there's the normal appropriations process, which is always complex, but especially so in an election year. We've been very encouraged to see the administration, which more than doubled its request for the coming fiscal year compared to last one. And then the house mark was even higher. The administration requested at $95 million, and the house put in $100 million. And industry large including the Nuclear Energy Institute have been actually urging $300 million, all with the same, frankly, view in mind of it's really time to get off the time, we're making significant huge investments really in these advanced reactors that ex energy and TerraPower are building under the advanced reactor development program and an absolutely imperative they got to fuel supply. And so I think it's quite logical, but it's also gratifying to see that people have sort of recognized that. And so I do expect you're going to see a continuing effort, Rob, in the Congress and the appropriation cycle is what it is, whether we'll see another continuing resolution and whether they get past the November elections would take some TV commentator not me to help you out.

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

Hey Dan and team thanks for taking the questions.

Hey Joe.

So on the $135 million of new contracts; I realize you can't give us a year-by-year on it. But any additional color as far as how that breaks down across the six years? Is it roughly even? Is it back-half weighted? Is it front-half weighted?

Yes. Joe, I don't think we really go into that kind of thing in public disclosure space. So I think we just kind of do the global numbers and then they will roll out in the successive quarters as they roll out.

Okay. Second thing, on the HALEU contract that you're competing for, can you kind of give us a little background on what the space looks like as far as the other competition, you guys are the only ones with a HALEU license right now. So like is this really an open competition? Or is it more a matter of the government has to say it is and you guys are really the only party in town.

Well, Joe, it's hard enough to speak on my own behalf, and I'm sure I'm not going to speak on behalf of other companies. But to the second part of your question, it's a real competition. I mean, the department has been out there. They had an Industry Day. It's real. And we're taking it very, very seriously indeed. These RFIs, if you've had any exposure to them are extraordinarily detailed and work intensive things. They -- I think, would make you proud as an American to see the hard work that goes into even preparing the RFI itself. And so to be responsive to very thoughtfully and thoroughly compared RFI is a massive undertaking, and we're taking it very seriously. We feel good about our capabilities. We feel good about what we bring to the table, but we are taking nothing for granted, and we're focused on the cycle laser beam.

Thank you.[Operator Instructions] There appear to be no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Thank you, operator. This will conclude our investor call for the second quarter of 2022. As always, I want to extend a thank you to our listeners online and investors who called in. And we look forward to speaking with you again next quarter.