LEU - AMEX

Greetings, and welcome to Centrus Energy Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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. You may begin.

Good morning. Thank you all for joining us. Today's call will cover the results of the third quarter 2024 ended September 30. 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 which is issued yesterday. We expect to file our report for the third quarter 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’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 would 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, October 29, 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 expressed written consent of Centrus is strictly prohibited. Thank you for your participation. And I'll now turn the call over to Amir.

Thank you, Dan, and thank you to everyone on the call today, both long-time listeners and those of you joining us for the first time. Our industry and Centrus specifically has a growing sense of momentum. Big tech companies are making historic investments. Reactors that shut down just a few years ago are set to restart. And as international conflicts drive shocks to energy markets around the world, policymakers have made a multi-billion dollar commitment to our domestic nuclear fuel supply chain. At Centrus, we are proud to be leading the effort to restore America's ability to enrich uranium, meeting the nation's needs while creating thousands of jobs in the process. Turning to our quarterly numbers. We have consistently stressed on these calls that, due to the nature of our business, there was a lot of quarter-to-quarter fluctuation in our results. Most of our revenue comes from the LEU segment, where our customers generally have multiyear contracts to take delivery of a given quantity at a given price each year. But they choose which quarter to take the annual delivery and don't choose the same quarter every year. Revenues and margins go up and down depending on how many deliveries happen to fall into a particular quarter, and whether those deliveries come from our higher-priced contracts or our lower-priced contracts. And as such, we believe our annual results are more indicative of our progress. In the third quarter of 2024, we achieved $57.7 million in revenue, a gross profit of $8.9 million and a net loss of $5 million. That is in line with our internal expectations for the quarter, particularly coming after a big second quarter result. Again, this variation is normal for us, and it's why we put our focus on annual numbers. What's even more important, however, is the trajectory we are on as a company and as an industry. As you know, last year Centrus began demonstrating production of high-assay, low-enriched uranium or HALEU in Piketon, Ohio, which is the only licensed and operating HALEU production facility in the Western world. I am pleased to report that earlier this month, the Department of Energy selected Centrus for a pair of awards aimed at expanded production of HALEU, as well as HALEU deconversion, which is a secondary step in the HALEU production process that occurs after enrichment. The HALEU production award covers a 10-year period and has a total contract ceiling of $2.7 billion which is cumulative for all four awardees the department has selected. The contract ceiling -- the contract ceiling for deconversion cumulative is for six awardees is $800 million. The initial selection only guarantees $2 million under each contract, but it makes us eligible for future task orders for the department, which could underpin a significant expansion of our capacity in Piketon. The ultimate dollar amount associated with these awards and the potential scale of the expansion supported will depend upon task orders subsequently issued by the U.S. Department of Energy to Centrus under the contract. In addition to the contract ceiling, the total value of the task orders will be limited by the availability of appropriations. Fortunately, the HALEU enrichment and deconversion RFPs as well as a third RFP covering LEU production, which has not yet been awarded are backed by more than $3.4 billion that has been appropriated by Congress to date. We responded to the LEU RFP in September with a proposal to establish large-scale production of LEU at our Ohio facility alongside what we hope will be expanded HALEU production and the new HALEU deconversion capability. The federal investment we are seeking coupled with private investment and commercial offtake commitments would form the basis for a public-private partnership aimed at restoring a robust domestic uranium enrichment capacity. As a reminder, we are the only publicly-traded uranium-enrichment company in the world and the only one with an American technology, American workforce and American supply chain. All of our competitors that enrich uranium today are foreign, government-owned entities. As another step towards creating a public-private partnership, we have secured a cumulative total of approximately $2 billion in customer commitments to support deployment of our new LEU production capacity in Piketon. These agreements are subject to signing final contracts and are contingent upon us securing the necessary public and private investment to build new capacity. We believe this reflects a strong appetite for new American LEU production and demonstrates customer confidence in Centrus' technical capabilities and commercial competitiveness. Our efforts to restore America's nuclear fuel supply chain have taken on added urgency in the last few months, particularly as major technology companies’ turn to nuclear, to power data centers and the AI systems of the future. For example, Microsoft recently signed a 20-year Power Purchase Agreement to restart the reactor in Pennsylvania, and the Department of Energy also finalized the financial package to enable the restart of the Palisades Nuclear Plant in Michigan. These represent the first reactors to ever restart after closing down. On October 14th, Google announced a partnership with Kairos Power to deploy a fleet of HALEU fuel reactors totaling 500 megawatts. Two days later, Amazon announced a $500 million investment and a commitment to help deploy four of X-energy's HALEU fuel reactors in Washington State as well as potential reactor projects in Virginia. That same day, the Department of Energy made $900 million available to support deployments of small modular reactors. That follows action by TVA, which increased its commitment to $350 million to develop small modular reactors at the Clinch River Site in Tennessee. The U.S. military is also looking to nuclear energy for national security. Next year, the Pentagon will begin testing prototype HALEU-fueled microreactor at Idaho National Laboratory. Meanwhile, the U.S. Air Force is looking to host a microreactor in Alaska. The U.S. Army is evaluating bids for reactors at two of its bases, and the navy recently began exploring possible reactor deployment on an underutilized sites in Maryland, Virginia, and North Carolina. Given all of this momentum, it's no surprise that in September, 14 of the world's largest banks, including Bank of America, Morgan Stanley, and Goldman Sachs, committed to support a tripling of nuclear energy capacity by 2050. These initiatives to expand nuclear have something in common. They all require fuel. Where the growth comes from reactor powered by LEU or HALEU or a mix of both. Centrus is well-positioned since our Ohio plant is the only U.S. site license for HALEU production and one of only two sites licensed for LEU. I will now turn the call over to Kevin to walk through the numbers.

Thank you, Amir. Good morning, everyone. Our financial results for the quarter remain in-line with our internal projections, based upon customer orders and deliveries. The third quarter of 2024 reflected more than a 70% decrease in SWU quantities delivered, but a higher sales unit price. As Amir noted, we believe our annual results provide a more accurate reflection of our business due to the nature of our contract cycles. We generated $57.7 million in revenue, an increase of $6.4 million, compared to the same quarter in the prior year. We generated a net loss of $5 million compared to net income of $8.2 million in the prior year. Our LEU business generated $34.8 million in revenue, a decrease of $5.7 million compared to the same quarter in 2023, reflecting a decrease in the volume of SWU sold, partially offset by an increase in the average price of SWU sold. Our cost of sales in LEU decreased from $30.4 million in the third quarter of 2023 to $29.6 million in 2024 due to a decrease in sales volume, partially offset by an increase in average SWU cost. We ended the quarter with an LEU gross profit of $5.2 million compared to $10.1 million in the third quarter of 2023. Our Technical Solutions segment also generated $3.7 million in gross profit, which was an improvement of $2.5 million versus the third quarter of 2023. On a consolidated basis, our gross profit was $8.9 million a slight decrease from $11.3 million in the prior year. Technical Solutions generated $22.9 million in quarterly revenue, an increase of $12.1 million compared to the third quarter of 2023, and reported $19.2 million in cost of sales, which was an increase of $9.6 million compared to the prior year. Our results on a year-over-year basis reflect transition of the HALEU operation contract from a cost share model under Phase 1 to a cost-plus incentive fee model under Phase 2. As Amir previously mentioned, as another step towards creating a public-private partnership, we have secured a cumulative total of approximately $2 billion in customer commitments to support deployment of new LEU production capacity in Piketon, which bolsters the company's total backlog. As of September 30, 2024, the company has a total backlog which extends to 2040 of $3.8 billion. Our LEU segment backlog is approximately $2.8 billion as of September 30, 2024 and includes future SWU and uranium deliveries, primarily under medium and long-term contracts with fixed commitments as well as the $2 billion in contingent LEU sales commitments subject to entering into definitive agreements in support of a potential construction of LEU production capacity at the Piketon, Ohio facility. The contingent LEU sales commitments also depend on our ability to secure substantial public and private investment. Moving on to our Technical Solutions segment. Our backlog which is approximately $0.9 billion as of September 30, 2024 includes funded amounts, unfunded amounts and unexercised options. The options relate to the company's HALEU operation contract. In the third quarter of 2024, we continued to leverage our ATM program, raising an additional $4.5 million proceeds, bringing our total year end proceeds net of related expenses to $23.8 million. These proceeds and the gross margin generated in the third quarter contributed to our ending cash balance of $194.3 million and a restricted cash balance of $32.6 million for a total of $226.9 million of cash and restricted cash. Maintaining a strong cash position continues to facilitate execution of our near-term contractual obligations as well as strategic investments in our long-term future. We continue to delever the financials, through strategic initiatives associated with our pension plans. In the third quarter of 2024, we have further reduced our pension plan obligations by $21 million. As of September 30, 2024, we have $29 million remaining in these pension plan obligations and are currently at a funding level in excess of 110%. The company will continue to evaluate opportunities to further strengthen its balance sheet position as part of a multi-year effort to better position the company to continue expanding enrichment capabilities without compromising the balance sheet. These initiatives are part of a broad strategy to optimize our cost structure, adequately manage our risks and place ourselves in a position to execute on our vision to restore America's ability to enrich uranium at scale. With that, let me turn things back over to Amir.

Thanks, Kevin. I'd like to close with a final thought about how we see our role in America's nuclear fuel supply chain, and what sets us apart from our competitors as we seek to build on our recent RFP wins and hope to secure a large share of this $3.4 billion that Congress has set aside for domestic nuclear fuel production. Nothing is guaranteed in this competition, but we believe, we have a strong case to make. We are the only company with an American technology and an American workforce, using an American supply chain that enriches uranium today. All of the other active enrichers today are foreign, government-owned enterprises. We are also the only enricher that actually manufactures our centrifuges in the United States. In September, we held a briefing for policymakers on Capitol Hill and unveiled our domestic manufacturing supply chain, which includes 14 major suppliers. Every one of them, an American company, employing American workers. The only other available operational centrifuges technology is the European design. It is exclusively manufactured in the Netherlands. Importing those machines to the U.S. does not change the fact that the supply chain and virtually all of the manufacturing jobs are overseas. Moreover, the terms of the agreement allowing for the import of European centrifuge technology prohibit Americans' access to their centrifuge technology, so even the installation has to be overseen by workers shipped in from Europe. European-owned enriches are great companies, owned by allied governments, but now is the time to reduce our dependency on foreign nations and bring to market additional supply from new suppliers. When it comes to U.S. tax dollars, we think the priority should be to invest in an American companies, using American technology built by American workers. This is a once-in-a-generation opportunity to reclaim U.S. leadership, and our nation cannot afford to squander it. Let me close by thanking our investors, without whom none of this would be possible. I appreciate you coming to this journey with us. We intend to deliver strong results for you, for our employees and for our nation. We're happy to take questions at this time. Operator?

[Operator Instructions] Today's first question is coming from Rob Brown of Lake Street Capital.

Good morning, and congratulations on the progress. I just wanted to follow-up on the HALEU selection and kind of next steps. I know you laid out a fair amount of information, but how do you see the next steps? And what's the sort of timing for getting the next contracts in place potentially?

I'll start with your last question first. Unfortunately, we do not know the timing. It's at the discretion of the Department of Energy. Right now, everybody got selected for IDIQ awards, which would total up to $2 million and after which, we'll be waiting for specific task quarters. So that would be the next step. The amount that will be allocated to these task quarters and the timing is really unknown at this point, Rob. I mean, obviously, we're hoping it will be sooner than later. There's a lot of work to be done and I think everybody is motivated to make it sooner than later, but we really have no feel for when that may happen.

Understand. Okay. And then, maybe just bigger picture as all of these new demand sources come on and view nuclear as an incremental power source. How does that change the market for you? And how do you view the overall market development, I guess, in particular it would be HALEU, but how do you view that happening now and as things accelerated there from your prior views?

We view all of this very favorably. Obviously, this strengthens our business case that strengthens our value proposition. More importantly, it strengthens our unique positioning in the market. Now what do I mean by that? Regardless of what's going to be built, whether it's SMR, advanced reactors or some of the multiple reactors are going to be restarted, all of them would need enrichment, whether it's LEU or HALEU. As we mentioned many times before, the amount of enrichment capacity is fairly limited and there's only four enrichers out there. Two of them are Chinese and Russians. There is three, including Centrus, that are Western and one U.S. with one U.S. technology, which is Centrus. Regardless of the build or the restart of reactors, all the demand will be funneled through the same number of enrichers. That creates a much stronger and reinforcement of our business case. All of this is very welcome news for us, particularly when you have large players like the high-tech jumping in and either direct investing or committing offtake to power, I think that is critical for the flow of investment to the rest of the supply chain.

[Operator Instructions] The next question is coming from Joseph Reagor of Roth Capital Partners.

Amir and Kevin, thanks for taking the questions. First one just on the contracts, just to confirm, I think Kevin kind of touched on this a bit. The two that you were just awarded, those would likely be in the fixed or cost share structure versus like the current HALEU contract that's the cost plus. Is that correct?

Yes. Thanks for the question, Joe. I think at this point, the way the IDIQ instrument has been designed is, it leaves flexibility for the Department of Energy to award these in a multitude of contract types, fixed price, cost reimbursable, cost share, even [T&M] is one of the eligible contract types. We believe, as they -- for this, we're going to see it in the form of something akin to a fixed price or cost reimbursable. I think those are likely those types of contracts that would be most applicable for a build out of this nature. But I think this is ultimately going to be at the discretion of the Department of Energy, as to, how they actually issue the individual task orders and they could do it through, like I said, a multitude of mechanisms.

Okay. And then, looking at kind of margins year-to-date, they've been quite a bit lower for the LEU segment compared to last year. I know you guys had timing of contracts and we all know that. But, there seems to be if you look back over the last couple of years, even years tend to be rolling down, the odd years tend to be rolling down. Is that a reflection of some of those really high margin contracts that you guys had a few years back are starting to roll-off the books and that the newer contracts that are being signed are somewhat lower margins, still good margin, but lower?

I think that's somewhat of an accurate statement. We have entered into contracts up and down the SWU curve since 2011. This quarter as you can tell from, where our deferred revenue balance landed at, that the majority of our revenues in this quarter were related to the contracts that we had already in our deferred revenue balances. What we see is that with margins in the current year that some of what the profits that you're seeing is from some of the contracts that we signed during the point in time, where the market was at its lowest. But it is key to remind everybody on the call that, we right now have about $900 million in backlog related to our broker trader business, and many of those contracts were signed at a point in time and where we were at a higher point within the commodity pricing curve. So we anticipate that we will still see solid margins on a go-forward basis. But, certainly, as Amir noted at the onset of the call, the way the contracts are crafted and when deliveries are taken, will be determined as to how the margins look and when the deliveries actually occur.

The next question is coming from Ryan Pfingst through B. Riley.

Good morning, guys. For the new contingent LEU sales commitments, could you share anything about those customers, those potential customers whether it's customer type or maybe geographically where they're located?

We did come out with a public announcement that we had an agreement with KHNP, which is one of the largest obviously operating nuclear utilities in the world. It was a great honor to be selected and to be able to finalize that contingent agreement. Beyond that, most of our agreements, as you know cover down their non-disclosure. We're unable to reveal the identities of those customers. But, by the nature of what we're talking here, LEU, you could be safe to surmise that, it would be for reactors that use low enriched uranium obviously. And so, these are all utilities that are operating and require LEU to power their reactors. So this is a present market. This is existing market. This is market that can be satisfied now with the build out of our LEU capability in our facility, for which we're licensed already. And so I hope that answers the question, Ryan.

Got it. Just to confirm, Amir, with that announcement in September, you had $1.8 billion in contingent sales today, $2 billion. So that does imply an additional $200 million, correct?

Correct. I think the math is right. I'm looking at Kevin.

Okay. Got it. Appreciate that. And then I guess for my second question, just to confirm, if and as you build out LEU production alongside HALEU production at Piketon, does that affect the expected timeline at all for the first cascade of HALEU, or do you expect to bring them both online in 42 months or so dependent on receiving the appropriate funding?

That is a good question. Probably want to get back to you on this one just to make sure I answered it thoughtfully and have the proper backing from our team. Just my initial reaction is, it would depend on the timing. I guess what you're asking is if everything aligns both from the HALEU and LEU side, is that going to change anything in some of the earlier projections we provide around 42 months. I'm kind of reading that that's your question. If that's what it is, then we'll certainly want to get back to you on that.

Thank you. At this time, I would like to turn it back over. Actually, I'm sorry, we do have another question is coming from Joseph Reagor of ROTH Capital.

Hi, guys. Just had one follow-up, thought of after effects. On the current HALEU contract that's cost plus, are you guys expecting that contract to continue next year, or is that still up for renewal? Just to get an update on it.

Yes. Thanks for the question, Joe. That contract currently expires in November, and we are in regards to Phase II. And we have three year option periods within Phase 3. And we're currently working with the DoE to extend that contract after the period of performance ends in November. I should note that, it was aligned with the delivery schedule that we had back in November. And so the formal contract ends on 12/31/2024, but we have a -- the one year period ends in mid-November.

Thank you. At this time, I would like to turn the floor back over to Mr. Leistikow for closing comments.

Thank you, operator. This concludes our investor call for the third quarter of 2024. As always, I want to thank our listeners online and those who called in. We look forward to speaking with you again next quarter.