LEU - AMEX

Greetings. Welcome to the Centrus Energy Fourth Quarter Year-End 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I’ll now turn the conference over to your host Dan Leistikow, you may begin.

Good morning and thank you all for joining us. Today's call will cover the results for the fourth quarter and full-year of 2022 ended December 31st. 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 fourth quarter and full-year of 2022 on Form 10-K later today. All of our news releases and SEC filings including our 10-K, 10-Qs, and 8-Ks are available on the 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 for 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 February 22nd, 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 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. Thank you to everyone on the call today. I'm pleased to report that Centrus delivered a strong fourth quarter finish in 2022. Whether you measure it by our strong top line annual numbers or by the long-term contracts we secured to help lay the foundation for the future of our business or by the improving market for nuclear fuel 2022 was a very good year for Centrus. With annual revenue of $294 million we achieved net income for the year of $52 million, that's a strong number by any measure. While it is lower than the 2021 number, it's important to keep in mind that 2021 included income from a one-time $43.5 million legal settlement, a $40 million tax adjustment, as well as an increase in the value of our pension assets as the stock market soared. Centrus was enormously successful in 2022 in securing new contracts to sustain and grow our business. In our LEU business segment, we secured a record $270 million in new sales contracts and commitments. With deliveries stretching out through 2030, the sales we made in 2022 will provide a steady source of revenue and margin for many years to come and importantly, maintains our long-term order book value at $1 billion for the LEU segment. We also bid for and won a competitively awarded Department of Energy contract that will enable us to begin first of a kind production of High Assay, Low-Enriched Uranium or HALEU by the end of this year and then continue producing in 2024. This will enable us to finish the work we started under a previous contract signed in 2019 to building cascade of centrifuges to demonstrate production of HALEU in Piketon, Ohio. In 2022, the department elected to move the operational portion of the demonstration into this new competitively a work contract that would allow for a much longer period of operations. The first phase of the new contract is valued at about $60 million, 50% of which will be paid by Centrus. Phase 1 requires us to complete construction, conduct operational readiness reviews with the Nuclear Regulatory Commission, secure NRC approval to begin operations and then produce an initial quantity of 20 kilograms of HALEU for the Department of Energy by the end of this year. Our cost share contribution ends after Phase 1. In Phase 2, we will operate the cascade for a full-year at a production rate of about 900 kilograms per year. We will be compensated in Phase 2 on a cost-plus incentive fee basis and that phase is estimated to be approximately $90 million. The contract also includes options as the Department sold discretion and subject to the availability of annual appropriations from Congress for up to nine additional years of HALEU production. This contract is critical on several levels. First, the HALEU we deliver to the department will help support the U.S. Government's efforts to support the demonstration and deployment of a new generation of advanced reactors. The department has already made a multi-billion-dollar commitment to help commercialize those reactors through the advanced reactor demonstration program. Nine of the 10 reactors the Department selected to support through that program require HALEU. Our success is critical to their success. Obviously, it will be very difficult to sell reactors commercially without a fuel supply as is often said in the industry no fuel, no funds. Second, this contract represents a crucial milestone in the effort to restore America's uranium enrichment capability. This will be the first new U.S. owned enrichment plant to begin production in 70-years. The last of America's cold war era enrichment plants shutdown permanently in 2013, leaving us for the last 10-years without a U.S. technology enrichment capability. We are about to end that streak and put America back in the enrichment business. And third, while the initial capacity of the plant will be modest. The facility itself has room for thousands of centrifuges and the site could accommodate up to 7 million SWU per year in capacity. The capital requirements are significant and will require a strong public private partnership. But with sufficient funding and off ticket commitments, our goal is to scale up to meet the full range of commercial and national security requirements for uranium enrichment, including low enriched uranium as well as HALEU. Their growing bipartisan support to such an approach and real dollars to back it up. The Inflationary Reduction Act includes a $700 million appropriation as a down payment on establishing a domestic supply chain for HALEU. In an October sources sought notice, the Department of Energy outlined 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. The sources 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 reflects the growing momentum behind establishing domestic HALEU production. In light of Russia's invasion of Ukraine, there have been a number of bipartisan proposals in Congress to expand the effort beyond HALEU production to include production of low enriched uranium for the existing reactor fleet as well. People now realize that it was a historic mistake for the United States to fall from first to last place in the world in the uranium enrichment, eroding our nation's energy security, exceeding geostrategic leverage to our [Indiscernible] and bridling our domestic supply chains, diminishing our global influence over non-proliferation and deferring critical efforts to provide for the nation's long-term needs to produce tritium for our nuclear arsenal and naval reactor fuel for our carriers and submarines. Now is the time to correct that mistake. We also face the reality that Russia possesses 46% of the world's enrichment capacity and there isn't nearly enough non-Russian enrichment to fuel the world's reactors. Data from the World Nuclear Association shows that global requirements for enrichment outside of Russia totaled 48 million separate work units or SWU per year, but the total enrichment capacity outside of Russia is only 33 million SWU per year. If Russian enrichment were excluded from the market, the global supply gap would be 15 million SWU per year, which is roughly equivalent to the entire annual enrichment requirements of the United States. It is also roughly equivalent to the entire annual enrichment requirements of Europe. There's no easy or fast solution to this problem. The only answer is to start investing through public private partnerships in new domestic capacity. It will take years to stand up this new capability at industrial scale, but you cannot reverse a multi-decadal decline overnight. As the old saying goes, the best time to plan a tree was 20-years ago. The second-best time is today. With the only deployment ready U.S. Owned enrichment technology and an NRC license site that has the infrastructure custom built for Centrus huge operation, Centrus is uniquely suited to restore this vital capability for the nation. We are continuing to engage with industry, policymakers, non-governmental organizations and other stakeholders to develop a path forward that would enable us to deploy our Made in America technology to produce LEU for existing re-enters and to meet U.S. National Security Requirements in addition to producing HALEU. I'll now turn the call over to Philip, who will walk you through some of the numbers. Thanks, Philip, over to you.

Thank you, Dan. Good morning, everyone. As discussed before, there's considerable variability in our revenue and margins from quarter-to-quarter. Last year for example, the first and third quarters were relatively subdued, but we had a big second quarter and then a strong finish in the fourth quarter. The nature of our business is that we have strong quarters and subdued quarters and it's not necessarily the same quarters every year, it’s dependent upon our customers. As Kansas City Chiefs fan, I can't pass up the opportunity point out that they don't award the Lombardi trophy until all four quarters of in play. It doesn't matter whose quarterback limped off the field in the second quarter or whether you're trailing after the third quarter. All it matters as the scoreboard says at the end of the game. By the same token, what matters for Centrus’ annual performance, not quarterly performance. So even though it was a very strong fourth quarter for us, that's what's more important is that it was a very strong year. In fact, our business improved year-over-year. So I'm going to focus on annual numbers initially. I'll start with the LEU segment, which involves the sale of enriched uranium to major utilities. We primarily sell the enrichment component, which is measured in separative work units or SWU, but we also have some sales of the natural ramp component of enriched uranium. In this segment, we actually increased our profit margin versus 2021 and generated $235.6 million in revenue. The cost of sales was $105 million for the year, resulting in a gross profit of $130.6 million for the segment for 2022. This compared to $186.1 million in revenue and $73 million in gross profit in 2021 for segment. This is an improvement of about $57.6 million in gross profit for the segment. And as Dan pointed out, we secured a record $270 million in new sales contracts and commitments in our LEU segment last year helping to maintain our long-term order book at about $1 billion. In our Centrus Technical Solutions segment, we're putting our technical and manufacturing capabilities to work, including our contract with Department of Energy to build and demonstrate HALEU production, as well as a variety of other contract work for public and private sector customers. In this segment, we generated $58.2 million in revenue against cost sales of $70.9 million for the year, resulting in a loss of $12.7 million for the segment 2022. I should note that this includes a one-time loss accrual of $21.3 million for the cost share associated with the HALEU operations contract that we talked about that were awarded from the U.S. Department of Energy. This compares to gross profit for the segment of $41.5 million in 2021, when we benefited from a $43.5 million one-time settlement of the pension and post retirement costs incurred in connection with the cash cost reimbursable contract performed at the Portsmouth. If you eliminate those one-time adjustments, the CTS segment had a $8.6 million gain in 2022 versus a $2 million loss in 2021. SG&A expenses were $33.9 million and $36 million for the year's ending December, 31, 2022 and 2021 respectively. So a decrease of $2.1 million. Now that's a reduction of almost 6% during the year when the economy as a whole saw 6.5% annual inflation. I recognize that the comparison for 2022 and 2021 is complicated. However, when you eliminate the one-time adjustments, our business improved year-over-year. We generated gross profit of $1179 million on revenue of $293.8 million and net income of $52.2 million. We are in a strong financial position going forward with an overall cash balance of $212.4 million, which includes $32.5 million of restricted cash for financial insurance. We won a long-term HALEU contract that positions us well for the future. And we have an LEU order book valued through 2030 of $1 billion as of December 31. With that, let me turn it back over to Dan.

Thank you, Philip. I spoke a moment ago about the need for public private partnership to develop domestic enrichment. Before we get to your questions, let me just say a few words about the rationale for government involvement in this and why I believe the idea is gaining traction. First, it's important to remember that the idea of government involvement and enrichment is not new. In fact, every enrichment plant that has ever been built anywhere in the world has been built with government ownership and government financing. Today, 100% of the world's enrichment plants belong to state-owned corporations controlled by foreign governments. Second, our new domestic enrichment capability would advance America's vital interest in ways that are not measured or reflected in the market price of enrichment, not only would it strengthen our energy security and climate goals, but it would also fill a critical hole in our national security supply chain. For example, the entire U.S. fleet of aircraft carriers and submarines, which are a lynchpin of U.S. power projection and deterrence are powered by fuel, we stopped producing in 1992. We also need domestically produced LEU to produce tritium to maintain the readiness of the nuclear arsenal that defends our homeland and allies by deterring our adversaries. These missions require the use of a domestic enrichment technology pursuant to longstanding non-proliferation agreements. The Department of Defense is also developing micro reactors that if deployed at scale would create significant additional requirements for domestically produced HALEU. So the case really boils down to common sense. The United States will need a homegrown enrichment capability to support our national security requirements. The need may not be imminent, but it is large and inevitable. Meanwhile, the world faces climate catastrophe right now and a critical choke point to maintaining and expanding our fleet of nuclear reactors providing clean energy is a robust diverse capability to produce enriched uranium fuel as rapidly as possible. Rather than stovepipe our efforts, doesn't it make sense to have an all-in-one solution that can meet national security requirements and commercial requirements at the same time, an integrated approach to America's needs would reduce the burden that will ultimately fall on taxpayers for national security enrichment, while derisking private sector investments in commercial enrichment by backstopping them with investments and enrichment capabilities needed for our nation's nuclear deterrent. This isn't rocket science, its history. In the 1950s President, Eisenhower and Admiral Hyman Rickover leveraged the U.S. Government's investment in enrichment to support national security in order to provide an assured source of fuel for the first generation of commercial nuclear reactors. Reactors that were based on those designed for the U.S. Navy, that ecosystem between the commercial and nuclear industry and our national security establishment has kept the nation safe and strong for nearly seven decades. We should learn from the vision and the determination of those great American leaders and building the same kind of public private partnership today needed to advance our energy, climate and national security objectives. Centrus is well positioned to play our part. We have the only deployment ready U.S. origin enrichment technology. We have the only site in the nation licensed for HALEU production and we're also licensed for LEU production. We have the buildings and the infrastructure in place, and I'm proud of our talented workforce, many of whose parents and even grandparents help build our nation's deterrent, who are as dedicated and as passionate as I am about restoring this essential capability to our nation's critical infrastructure. As I said earlier, with sufficient funding and financing that could come through a robust public and private partnership, we can scale up to whatever level of production is required, while creating thousands of family supporting jobs in the process. And with that, we will now take your questions. Operator?

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

Hi. Good morning, Dan, Philip. Thank you for [Multiple Speakers]

Hey, good morning.

Hey, Rob.

Just wanted to get a sense of, kind of, the DOE support, I think the 900-kilogram Phase 2 project, I think you said there was one year that you've got a commitment for. Maybe help us understand kind of how the follow-on year options take place? And then kind of how does that dovetail into the new kind of proposed efforts for additional offtake agreements to support the industry?

Yes. Great question, Rob. So there are in the demonstration phase that we've completed, the machines as you probably saw in our recent release are up and we've done initial testing. Now we're in the new operations contract and as you suggested, that's got three phases. The first phase, which is this 50-50 cost share, will be contributing $30 million, we'll just produce 20 kilograms. And as soon as we finish that first phase, we will immediately pivot into Phase 2 that will run about a year and under that one we'll produce about 900-kilograms. After that the department has at its discretion three-year option periods. And we estimate those would run at about $90 million per year. And as we indicated in the earlier comments, it's only that first phase that 20-kilograms that's cost shared. After that, we shift to a cost-plus incentive fee program. So those extension periods also would be subject to the availability of appropriated funds. So those op in three-year chunks, and so the whole thing, if they exercise every option and there's no way to know in advance whether that would happen or not. But maximum length of that contract will be on the order of 10-years, right? How does that relate to the new efforts you alluded to? Well, as we also indicated in the remarks, there were some sources noticed that was issued Industry Day was held and there is an expectation that there will be a draft request for proposals coming out that would address the increased need and in fact the requirements of the energy Policy Act of 2020 to support the advanced reactor development program and the U.S. Advanced Reactor Development overall. So the indications are that, that could be on the order of up to 25 metric tons of HALEU per year. But of course, we don't know and we won't know until the draft RFP is issued and it has not come out yet, but we're looking forward to it.

Okay, great. Thank you. And then just wanted to get more detail on the kind of the cost share accounting, you took the full cost share accounting hit in Q4 is that right? And so now it will be sort of zero gross margin business going forward. Is that helpful so we can?

Yes. That's right. That’s right, Rob.

Go ahead.

Yes, Rob. So that's -- in the fourth quarter, we talked about taking that $21.3 million accrual, if you will. And then it's zero profit for the -- throughout the first phase, if you will.

And our next question comes from the line of Joseph Reagor with ROTH. Please proceed with your question.

Hey Dan and Philip. Thanks for taking the questions.

Hey, Joe.

Good morning, Joe.

Good morning. So I guess first on the order book, I believe the number you gave was $1 billion, is that like a rounded number? Is that roughly the current number? And then how does the shape of that look through 2030. I know you can't give specifics, but just general outlook.

Yes, so that's a rounded [Multiple Speakers] Go ahead, Philip.

Sorry about that, Dan. Yes, that's a rounded number. That's a rounded number, Joe. But essentially, it's been very stable as we've talked about before. In terms of the way it's laid out, we haven't talked about that, but it's kind of like any backlog curve. In other words, in the near term, we have more visibility and then it kind of -- it bleeds out if you will through 2030 in kind of a natural curve. So again, it's a strong order book that does provide us visibility -- better visibility in the near-term than it does in the longer term.

Okay, fair enough. And then if I think back to last year, you'd kind of given a, what's called a broad guide that through sales would be up 2022 on 2021. Two-parts to this, one did sales come roughly in line with expectations above/below what you were thinking a year ago? And then how do you look at 2023, compared to 2022?

So the first part, what we gave was guidance and you'll recall we gave the guidance back in 2020. And that was -- the specific guidance was that for the LEU segment that we saw that the margin would be about the same. In ‘21 and ‘22, but that the revenue would increase. And so that was exactly what happen, right, when you look back at ‘21 and ‘22. We've not elected to give guidance for ‘23 yet, so apologize, but we just haven't done it today.

[Operator Instructions] And it looks like we have reached the end of the question-and-answer session. And I'll now turn the call back over to Dan Leistikow for closing remarks.

Thank you, operator. This will conclude our investor call for 2022. As always, I'm going to extent a thank you to our listeners online and our investors who called in. We look forward to speaking with you again next quarter.