LEU - AMEX

Greetings and welcome to the Centrus Energy First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Dan Leistikow, VP Corporate Communications. Thank you, Dan, you may begin.

Good morning and thank you all for joining us. Today's call will cover the results for the first quarter of 2023 ended March 31st. Today we have Dan Poneman, President and Chief Executive Officer; Philip Strawbridge, our 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 first quarter of 2023 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 the 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 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 May 9th, 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 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. I'm pleased to report another healthy and profitable quarter for Centrus, kicking off the year with $66.9 million in revenue and net income of $7.2 million. We ended the quarter with $188.8 million in cash. We always remind our investors that our revenue and margins are lumpy due to the structure of our contracts. So, what matters most is not any one quarter, but what happens over the course of a year. Nevertheless, we are off to a strong start both in terms of bottom-line numbers and in laying the foundation for our future growth. I am incredibly proud of our technical teams in Ohio and Tennessee. They have continued to execute superbly on our contract with the US Department of Energy. In February, we completed construction of the demonstration cascade of centrifuges we have been building in Piketon, Ohio, along with most of the support systems. Having recently completed our Operational Readiness Review, we're now looking forward to receiving formal written approval from the Nuclear Regulatory Commission to possess licensed fizzle material. The next steps will be to finish construction of the remaining support systems and complete some final testing activities before we bring the cascade online. I'm pleased to report that we remain on track to begin operations and production by the end of this year. This will make history as the first new US-owned US technology enrichment plant to begin production in 70 years. If you haven't done so already, I encourage you to visit our website to read our shareholder letter to learn about the progress we've made thus far and to take a look at photos of the cascade. It is an impressive site and a sign of good things to come. The Piketon plant is the only facility in the United States licensed by the Nuclear Regulatory Commission to produce high assay low enriched uranium or HALEU, which is currently available only from Russia. By establishing a domestic supply chain for HALEU, we can help facilitate the commercial deployment of a new generation of HALEU fuel reactors to meet the world's climate and clean energy needs. In addition to the many HALEU-fueled small modular reactors under development, there are a number of microreactor designed by companies like Oklo, Radiant, Westinghouse, USNC, and others for which HALEU's high energy density will be necessary. Even as we begin production of HALEU under contract with the Department of Energy to support the Department's mission requirements, our ultimate goal is to scale up the facility to meet the full range of commercial, government, and national security requirements for enriched uranium, including HALEU as well as the LEU that can power the existing reactor fleet. The Piketon facility has roughly the same footprint as the Pentagon, with room for thousands of additional centrifuges and it is already licensed for large scale production. Later this year, we expect to complete Phase 1 of our contract with the US Department of Energy, which covers bringing the cascade into operation and delivering an initial 20 kilograms of HALEU to the department. Phase 2 will involve a full year of production at a rate of 900 kilograms per year. These two phases represent the base contract. In Phase 3, the Department has options for up to nine years of additional production. Those years are at the Department's sole discretion and subject to the availability of appropriations. Expanding the plant will require significant federal investment and a strong public-private partnership, particularly in an industry that's dominated by foreign government-owned corporations. There is growing recognition in many quarters among leaders in industry, organized labor, academia, non-governmental organizations, as well as in government on both sides of the aisle about the need to invest in restoring America's domestic uranium enrichment capacity. The Department of Energy needs a US technology enrichment capability for a number of national security missions. The war in Ukraine has also reinforced energy security concerns within the United States and among our friends and allies. The reality is that Russia has 46% of the world's enrichment capacity and there's not enough non-Russian capacity in the world today to fuel the world's reactors. Over a century ago, Winston Churchill said that and this is a quote, "Safety and certainty in oil lie in variety and variety alone." That logic applies equally today when it comes to nuclear energy. The world needs not only more enriched uranium supply, but also more enriched uranium suppliers, and that is where Centrus fits in. As a first step to address the critical need for HALEU, the Inflation Reduction Act signed in 2022 provided $700 million to help establish a domestic HALEU supply chain. Congress added another $100 million as part of the Omnibus Spending Bill at the end of last year. In October, the Department of Energy issued a Sources Sought notice in anticipation of an eventual request for proposals. The Sources Sought notice outlined a robust program to purchase significant quantities of HALEU through 2032. Of course, additional appropriations would be required fully to implement that program. Given how important HALEU is to our energy future and to America's global leadership in nuclear and given the fact that our country needs a new enrichment capability to meet long-term national security requirements, we hope that Congress and the administration can come together and make the investments that are required building on the strong down payment that was included in the Inflation Reduction Act. Centrus stands ready to do our part. Our facility is already licensed and we believe we offer the fastest path available to large-scale HALEU production. Centrus also has the only deployment-ready US technology that can meet national security requirements for enriched uranium. And when it comes to national security enrichment, a US technology is required because long-standing US policy and binding nonproliferation agreements prohibit the use of any foreign origin enrichment technology for national security. And with that, I will now turn the call over to Philip, who will walk you through some of the numbers.

Thank you, Dan. Good morning everyone. As discussed, there is considerable variability in our revenue and margins from quarter-to-quarter. Last year, for example, more than 90% of our gross profit came in at Q2 and Q4. The vast majority of our LEU contracts are multiyear contracts. Our customers have a purchase obligation on an annual basis, but not on a quarterly basis. They choose which quarter to take delivery, and we booked the revenue and cost of sales in that quarter, which often varies from year to year. What matters for Centrus, of course, is the annual performance, not the quarterly performance. That said, as Dan mentioned, we had a very strong first quarter. Overall, our total revenue increased by $31.6 million over 2022 levels to $66.9 million. In the LEU segment involving the sale of enrichment to utilities, we generated $58.8 million in revenue for the quarter. The cost of sales was $34.9 million, resulting in a gross profit of $23.9 million for the segment. In our Centrus Technical Solutions segment, which includes our contract with the Department of Energy to build and demonstrate HALEU production as well as a variety of other contract work for public and private sector customers, we generated $8.1 million in revenue against cost of sales of $9 million for the quarter for a gross loss of $900,000. We're in a strong financial position going forward with an overall cash balance of $221.3 million, which includes $32.5 million of restricted cash for financial assurance. As of March 31, our LEU order book is valued at $1 billion through the end of the decade. Now, that total is just for the LEU segment and does not include our Technical Solutions segment. So, it excludes, for example, the HALEU operations contract with the Department of Energy, which we won last year under competitive solicitation. With that, I'm going to turn it back over to Dan.

Thank you, Philip. Before we get to your questions, I'd just like to say a word about what we believe is a clear trend toward growing demand for nuclear fuels. Just look at what has happened in the last few months. On February 28th, the California Energy Commission approved plans to avert the premature shutdown of the Diablo Canyon nuclear power plant, recognizing the reality that nuclear power is essential to meeting our decarbonization targets. On March 1st, X-energy announced a new partnership with Dow Chemical to deploy four HALEU fueled Xe-100 reactors at one of Dow's industrial facilities along the Gulf Coast. On March 2nd, the Department of Energy invited US Utilities to apply for the next round of awards under the $6 billion Civilian Nuclear Tax Credit program aimed at preserving America's large existing fleet of reactors. On March 28th, the government of Canada proposed a new 15% refundable investment tax credit for clean energy that can support construction of new nuclear plants, both large and small. On March 31st, PacifiCorp announced plans to build 2 additional HALEU-fueled natrium reactors with TerraPower by 2033. That in addition to the one they plan to build in Wyoming by 2030 with the help of a $2 billion commitment from the US Department of Energy. On April 1st, a large new reactor in Georgia began producing electricity. It's the first new reactor built in the United States in the past 30 years. A second new reactor at that site is nearing completion as well. On April 25th, Gallup released new poll results showing public support for nuclear energy at the highest level in a decade. And just last week, Dominion Energy filed its integrated resource plan outlining options to build between three and six small modular reactors in Virginia over the next 15 years. Duke Energy's CEO, Lynn Good, told a shareholder meeting that Duke is committed to continuing its pursuit of nuclear energy and supporting the development of small modular reactors, including through a partnership with TerraPower. Westinghouse unveiled plans for a new 300-megawatt small modular reactor called the AP300. And in Japan, Prime Minister Kishida, announced a three-year program to invest in the development of sodium fast reactors. All of this points to a strong and growing nuclear market here in the United States and around the world. Centrus has a critical mission to enable the next chapter nuclear energy, starting with HALEU production. By the way, not only can HALEU meet our needs here on earth, but it can also take us to the stars. In fact, NASA and DARPA announced plans earlier this year to test a new HALEU-fueled nuclear thermal engine by 2027. We look forward to the opportunity to produce the fuel for future missions that will take humans to Mars and beyond. Finally, I want to thank all of our investors who are supporting us in this important work. And with that, operator, we'll take your questions.

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

Good morning and congratulations on all the progress.

Good morning Rob.

Good morning Rob.

I know you have the contracts in place for the HALEU production. But as that sort of looks to next steps and then some of this IRA support and the support after, how do you see that in terms of timeline? When do decisions get made and what are some of the next steps that extend that potential for you?

Well, great question, Rob, and good to talk to you. So, the $700 million is now in the process of being effectively translated through this request for proposals that we have been talking about. That will be the next important step. We don't know exactly what day it's going to come out. They've been working on it at the US Department of Energy and that's a very important milestone in funding the next phase to build up. From a decision to make those kinds of investments and to raise the capital necessary to build to the next phase, we can end up building another cascade within about 42 months of a final investment decision. And so that's sort of the timeline we're talking about. Building enrichment facilities is a matter that takes, as you know, Rob, a few years. And the critical path item here is getting that government contribution that will tell private capital that this is a safe bet to invest in.

Okay. Thank you. That's great color. And then as you kind of think about investment, I think you've talked about this before, but how does that investment work? Does that still to be determined with the DOE contracting? Or do you expect it to be sort of similar to what the projects you've done thus far?

We really don't know, Rob, because that's exactly what we're expecting to see come out of the request for proposals. There's a number of ways to skin the cat. One way that's been talked about a lot is to use the power of government offtake demand to fund these investments. There are other models like cost share models that have been used, for example, in the ARDP program. And so we're just curious as anybody, but we won't know really the structure of what it's going to be until we see that RFP rollout.

All right. Thank you. I'll turn it over.

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

Hey guys. Thanks for taking the questions and congrats on a good start to the year.

Thank you, Joe.

Thanks Joe.

So, just kind of a big picture thing. Have you guys seen any changes in the overall contract market, whether it is for unenriched or enriched uranium following some of the Senate and House bills that were proposed?

Well, I don't really see a change, though, based on the legislative calendar or the introduction of legislation, what we have seen and actually some of this predates the Ukraine invasion, but prices overall at enrichment bottomed out around August 2018, they had been rising. They got up to in the $50 range at the time of the invasion. Since the invasion, the anxiety in the market has produced a pretty substantial rise up to $140 in terms of indicators that are published in the trade press. And so I think most of the change was, I think, internalized in that sense, not key to particular legislation being introduced, but rather to the broader secular trends in the market that are driven by Ukraine and the concern that Russia, which has been such an important supply source with, as I mentioned in my remarks, 46% of the installed production capacity of enrichment globally and the concern that, that has spawned has, I think, driven a lot. And obviously, the other related aspect to this, since you can't shelf uranium powder through a centrifuge machine, you got to turn that powder into a gas, then septic all conversion. And obviously, the same demand spike or the concerns that have driven the price on enrichment north have also since there's a tight supply chain in the conversion space, you've seen increase in the conversion market as well. Now, there is expectation that ConverDyn is going to restart their plant Metropolis, Illinois, which should ease some of that, but that's another trend that we see.

Okay. And then just kind of a slight follow-up. Are you guys going to continue to look at signing contracts with utilities beyond that 2028 date that was suggested in the Senate bill or would you guys be focused more on near-term contracts, at least for now?

Well -- and Philip, you may want to chime in here. We always are looking to the future. And we're always looking for ways in which we can shift from our short-term efforts to a longer term glide path. We are very focused now on seeing if we can succeed in making the transition from brokering the material that we're now getting from existing supply contracts to adding our own material to the supply chain and therefore to manage a segue between operating purely as a brokerage operation to one that has our own supply to add to the market. And if we do that, we will extend our glide path in terms of forward sales well into the future measured in decades. Philip?

Yes, Joe. I mean, first of all, we'd focus on both near-term and long-term opportunities. And that legislation, again, draft and way out in the future would only apply to one of our supply contracts. We have other supply contracts as we've mentioned before, so.

Okay, fair enough. I'll turn it over.

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 remarks.

Thank you, operator. This will conclude our investor call for Q1 of 2023. As always, I want to extend a thank you to our listeners online and our investors. We look forward to speaking with you again next quarter.