LEU - AMEX

Greetings and welcome to the Centrus Energy Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow presentation. [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. Thank you, Dan, you may begin.

Good morning. Thank you all for joining us. Today's call will cover the results for the third quarter of 2022 ended September 30th. And 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 our report for the third quarter of 2022 on Form 10-Q 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'd 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 time sensitive and accurate only as of today November 9th, 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 expressed written consent from interest 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. During our earnings calls over the past several years, I have consistently emphasized the lumpiness in our business in terms of quarter-to-quarter variations and our third quarter numbers are a case in point. But even though the numbers this quarter were down, we remain on track for a strong year. And from an operational and strategic standpoint, our accomplishments in the third quarter combined with actions taken by Congress and the administration as well as key developments in the marketplace make me even more bullish today than I was three months ago. I will walk through a few of those developments in a moment, but let me begin by discussing our results. In the third quarter, we booked $33.2 million in total revenue, but a net loss of $6.1 million. This dynamic is consistent with previous year. As listeners on these calls will recall, our revenues and margins vary considerably quarter-over-quarter, primarily based on two factors: the timing of our customer deliveries and the wide range of pricing in our order book. Customers generally have long-term multiyear contracts with an annual purchase commitment and we booked the revenue from that sale in the quarterly the customer elects to take that delivery. The unit pricing varies considerably from contract to contract based on the market prices at the time the contracts were signed. For context, long-term prices hit historic highs above $160 per separative work unit in 2010 historic lows of $40 per separate work unit in 2018 and have surged again this year to $135. So the prices in our order book reflect a wide range. Our third quarter 2022 deliveries happened to be at much lower pricing than the deliveries fulfilled in the same quarter of last year, and so our margins this quarter were lower by comparison. As we've discussed, there's no such thing as a typical quarter for Centrus, which is why we focus on our annual performance. Through the first three quarters of the year, we have booked net income of $30.9 million and gross profit of $69.5 million. More importantly, and taking a longer view, we continued to make progress and see positive development on a number of fronts over the last three months. First, from an operational standpoint, we are continuing to make all of our scheduled customer deliveries in spite of the pandemic and uncertainty in global energy markets related to the Ukraine invasion. Second, this has been a very strong year for Centrus in winning new sales. Year-to-date through the end of September, we secured $270 million in new sales and contracts and commitments covering deliveries through 2030 and continuing to build long-term value for the company. Third, the US government's effort to support the establishment of a domestic source of enrichment to produce High-Assay Low-Enriched Uranium or HALEU continues to gain momentum. In late June, the Department of Energy issued a request for proposals to help finish construction of the HALEU demonstration cascade we have been building in Piketon, Ohio and eventually to begin production on that site. We submitted our proposal to bid for the competitively awarded a contract in August, and the department has indicated in a recent industry briefing that a decision could come as early as this month. Furthermore, in August, the President signed the Inflation Reduction Act through which Congress appropriated $700 million as a down payment in the effort to reestablish a domestic supply chain for HALEU. Last month, the Department of Energy issued a sources sought notice, outlining a potential 10-year program to support the construction and operation of HALEU enrichment in the United States via government purchases, of up to 25 metric tons of HALEU per year. This source sought notice is a preliminary step, not a formal request for proposals. And the department would require additional annual appropriations beyond what is contained in the Inflation Reduction Act to fully implement that program. But, it shows that the department and policymakers on both sides of the aisle, are strongly committed to this effort and willing to put substantial resources behind it. And fourth, in addition to the growing momentum behind HALEU that I have just described, there's also growing support from both industry as well as government, to invest in America's domestic supply chain for the low-enriched uranium or LEU that powers the current fleet of reactors in the United States and around the world. The Ukraine invasion has sparked rising concern about energy security and the United States is uniquely vulnerable, because our country is the world's largest importer of enriched uranium. Russia, accounts for 46% of the world's enrichment capacity, and currently there's not nearly enough uranium enrichment capacity outside of Russia, to fuel the world's reactors. The World Nuclear Association, projects that by 2030, China and Russia together will comprise 63% of global enrichment capacity, with European state-owned enterprises making up the other 37%. Reactor owners and operators require diverse sources of supply, so they know they can count on having a stable, secure, fuel supply chain from a resilient market with competitive pricing. That explains the growing consensus that the market needs an American producer. Centrus is well positioned to fill that role. We have an active NRC license, relationships with all the major utility customers and a proven technology that is uniquely valuable because it can meet not only commercial requirements but also America's long-term national security requirements. It is a sad fact that the United States has fallen from first to last place in uranium enrichment, a technology that was invented here in the United States during the second World War, has defended our allies and deterred our adversary and used to dominate global markets for commercial fuel, supporting both American jobs and US nonproliferation policies. But it is a fact, and one that motivates every Centrus employer – employee to wake up every day and work hard to regain our lost leadership in its vital capability that is equally essential to US National Security as well as to the epic barrier to cut air pollution and slight climate change. Indeed, Centrus has the only deployment-ready enrichment technology that is legally available to support National Security missions, for which a domestic technology is required. The Biden Administration has proposed a multibillion investment in domestic LEU enrichment and Senators Manchin, Marazzo, Rich and others in Congress have offered their own proposals for federal investment. In recent months Centrus has been part of a robust conversation, involving industry, policymakers, nongovernmental organizations and other stakeholders, all focused on developing a path forward that would enable us to deploy our homegrown technology to produce LEU for existing reactors and to meet US National Security requirements in addition to producing HALEU. So I'll now turn the call over to Phil, who will walk you through some more of the numbers. Philip?

Thank you, Dan. Good morning, everyone. As we regularly discuss in these calls, there's considerable variability in our revenue margins from quarter-to-quarter, which is why we focus on what happens over the course of the entire year. The first quarter of this year was relatively subdued. We had a big second quarter with a larger number of LEU deliveries, fulfilled on higher-priced contracts. And as Dan mentioned, the few deliveries fulfilled in the third quarter happened to be on our lower-priced contracts, so our margins were lower as a result. In our LEU segment, we generated $20.2 million in revenue against cost of sales of $18.9 million for the quarter, resulting in a gross profit of $1.3 million for the segment. Revenues and margins for the segment were lower than the same quarter of 2021, as a result of lower average market prices for our deliveries, which was partially offset by an increase in the quantities we delivered. In our Centrus Technical Solutions segment, we generated $13 million of revenue against cost of sales of $12 million for the quarter resulting in a gross profit of $1 million for the segment. Segment revenues were $46.3 million lower than the same period of 2021, when we recorded a $43.5 million settlement with the Department of Energy for pension and postretirement health benefits related to a contract the company performed many years ago with the Portsmouth Gaseous Diffusion Plant. Excluding that settlement, segment revenue declined by $2.8 million for the quarter but that was more than offset by the $6.1 million reduction in the cost of sales. Combining the two segments, we produced a gross profit of $2.3 million net loss of $6.1 million and revenue of $33.2 million for the quarter. Through nine months, we've achieved $69.5 million in gross profit and $30.9 million in net income from revenue of $167.6 million. For the three-month period, our SG&A expenses were $8.6 million, down from $9 million in the same quarter of 2021. Through the first nine months of the year, our SG&A expenses were down from $25 million last year to $24.4 million this year. We're in a strong financial position going forward with overall cash balance of $153 million, which includes $21.1 million of restricted cash for financial assurance and a long-term order book value through 2030 of approximately $1 billion as of September 30. With that, let me turn things back over to Dan.

Thanks Philip. Before we get to your questions, let me just take a moment to talk about the outlook for the nuclear industry as a whole, which is continuing to improve. The war in Ukraine has caused a great deal of turmoil across global energy markets, particularly for oil and gas. The North Stream pipelines in Europe have been disabled. Natural gas prices have skyrocketed, and we have all been starkly reminded of the risks of overdependence on fossil fuel energy, particularly for nations that are not blessed with abundant fossil fuel reserves. That's having a huge impact on electricity markets. The International Energy Agency recently reported that average wholesale electricity prices in the European Union in the first half of 2022 were more than three times higher than in the first half of 2021 driven by the rising price of fossil fuels. That means nuclear is increasingly competitive in the electricity market, a market that is expected to grow substantially around the world in the coming years driven by the rise of electric vehicles, greater use of electricity and heating and bringing electricity to more than a billion inhabitants of our planet who don't have it today. Meanwhile, as the United States ramps up our exports of natural gas to our partners and allies, the overall rising demand is putting upward pressure on domestic natural gas prices as well. US electric utilities tend to pay twice as much for natural gas this summer compared to last summer and the price was more than triple what they paid in the summer of 2020. Those price increases and the price volatility they represent make the economics of nuclear even more attractive. Nuclear is much less vulnerable to fuel price volatility, because fuel is a much smaller percentage of the overall cost. So nuclear energy remains affordable, even when the cost of enriched uranium goes up. The net result of all of this is a growing recognition all over the world of the need for more nuclear energy a lot more. In fact, in the International Energy Agency 2022 World Energy Outlook, just released in late October, significantly upgraded the long-term projections for nuclear energy generation across all three of the agencies' scenario for the future. For example, in last year's report, the IEA estimated under their net zero emission scenario, that global nuclear gen would double by 2050, which is consistent with previous analyses by the International Panel on Climate Change and others. In the new updated report, the net zero emission scenario, generating double its current capacity by 2040, representing a substantially faster new reactor deployment worldwide. We've posted a couple of interesting charts based on the World Energy Outlook data on our Twitter feed, and if you have not already, please do take a moment to follow us. We are @centrus_energy. And with that, we will take your questions. Operator?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rob Brown with Lake Street Capital. Please, proceed with your question.

Hi. Good morning, Dan and Philip.

Good morning, Rob.

Good morning, Rob.

Just wanted to get a little perspective on the capacity of the demo facility and sort of what capacity or facility scale would be needed for sort of 25 metric tons in the DOE sort of initial document that you talked about?

Yes. Good question, Rob. So basically the 16 machines, if you assume feedstock of just lower range of the typical 4.95% enrichment level, that will produce just under 1 metric ton per year, so between 900 kgU and 1 metric ton per year. And to basically expand to produce on the order of 25, basically every cascade -- the cascade typically get deployed in chunks of 120 machines each. And each one of those produces 6 MTU per year, with the same kind of feedstock. So, I mean, you can do the math. So, basically, four of those would produce 24 plus 1 MTU off the demo cascade that would provide 25 MTU per year.

Okay, great. Thank you for that color. And then, just kind of thinking through the lumpiness of the business, I know your annual numbers are pretty solid and they move around for the quarter. But just want to confirm any sort of changes in the market, or this is truly just a timing and delivery kind of quarter and things sort of pick up or change annually, they maintain where you thought they’d be?

Yes. It's truly lumpiness. In other words, the things that you see in the market, you can see in the price curves that we mentioned in the original laydown. The prices were $56 per SWU before all of the challenges we faced in Europe and now they're $135 long-term market. And as you know, most of the business is contracted long term. So those are very strong price trends. And with the continued unrest in Europe and in addition, the secular increase in climate-driven concerns and the consequent -- the traction of nuclear, we think that aspect is solid. As we noted, we have booked a lot of sales ourselves in the last three quarters. So it's just generally and genuinely the lumpiness, because different contracts get deliveries in different quarters. And it just doesn't even out except over a year-to-year kind of basis.

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

Hey guys. Thanks for taking my questions.

Hey Joe. Good morning.

Good morning. So, first on contracts, so you signed 270-or-so million new contracts, should we anticipate any of that? I know you're not going to quantify it, but any of that this year before year-end?

I'm going to -- in terms of quarter-by-quarter stuff like that I'm going to kick that over to Philip.

Yeah. No those were long-term contracts that are signed out into the future as we described before, Joe. That's the great thing about this industry is that you're selling out -- as we say in our order book to 2030. So that means that we've got visibility for a good time. But those contracts are ordered well in advance.

Okay. And a little follow-up on contracts then, is there any potential for anything that you might have at the beginning of the year anticipated this year being pushed into early next year, or is it a matter of whatever the number was that you expected this year will happen by year-end?

Go ahead, Phil.

Yeah, that's a great question. Nothing's happened this year that would change what our vision was at the beginning of the year. I mean, that's the bottom-line. Again, that assumes that there's, no sanctions between now and those markets disruption, right? So as I mentioned before, the great thing about our company and the revenue is that we've got great visibility. So we don't see any change really.

[Operator Instructions] It appears we have no further questions. I'd like to turn the floor back over to management, for closing remarks.

Thank you, Operator. This will conclude our investor call for the third quarter of 2022. And as always, I want to thank all of you who listened online, and all of our investors who called in. We look forward to talking to you again, next quarter.