Centrus Energy Corp. (AMEX:LEU) Q1 2024 Earnings Call Transcript

Centrus Energy Corp. (AMEX:LEU) Q1 2024 Earnings Call Transcript May 8, 2024

Centrus Energy Corp.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Centrus Energy First Quarter 2024 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 will now turn the conference over to your host, Dan Leistikow, Vice President, Corporate Communications. Thank you. You may begin.

Dan Leistikow: Good morning. Thank you all for joining us. Today, we’ll cover the results for the first quarter 2024 ended March 31. Today, we have Amir Vexler, President and Chief Executive Officer; and Kevin Harrill, our 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 issued yesterday. We expect to file our report for the first 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 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 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, May 8, 2024, unless otherwise noted. This call is a property of Centrus Energy. Any transcription, redistribution, retransmission, or rebroadcast of the call in any form without the express written consent of Centrus is strictly prohibited. Thank you for your participation, and I’ll now turn the call over to Amir Vexler.

Amir Vexler: Thank you, Dan, and thank you to everyone on the call today. In the first quarter, we achieved $43.7 million in total revenue, $4.3 million in gross profit, and a net loss of $6.1 million. As we have said many times before, the best way to look at our business is on an annual basis rather than quarterly, because of the way our contracts are structured. Our LEU customers generally have long-term multi-year contracts that commit them to pay for a given quantity of fuel each year. They decide which quarter to take delivery, which is when we book the revenue. Another factor is the market price of enrichment, which has varied significantly over the last several years, leading to contracts with different pricing depending on when they are signed.

So, when we have a first quarter with fewer deliveries and lower-price contracts, we tend to make it up in the rest of the year. Having said that, the fact is this was an incredibly productive quarter for Centrus, a period in which we booked new sales, achieved new milestones in production of High Assay Low-Enriched Uranium, applied for hundreds of millions of dollars in funding to advance those efforts, and saw Congress approve a historic investment in uranium enrichment. Last year, at our facility in Piketon, Ohio, Centrus embarked on a first-of-a-kind production of High Assay Low-Enriched Uranium, or HALEU, the advanced nuclear fuel component needed for the next generation of reactor. In November, we announced the delivery of our first 20 kilograms of HALEU under Phase 1 of our competitively awarded contract with the U.S. Department of Energy.

As we discussed on our last earnings call, the amount of HALEU we’ve been able to produce since that time has been limited as the department continues to experience difficulties in getting us enough HALEU storage cylinders for the continuous production of HALEU. We don’t expect the interruptions in receiving the cylinders to have an adverse material financial impact on Centrus. Since we’re continuing to meet our obligations under the contract and the department is compensating us on a cost-plus-incentive-fee basis. We continue to expect that the supply chain issues with the storage cylinders will be resolved sometime later this year and won’t be an ongoing issue after that. We’ve been continuing to fill cylinders as we get them and make additional deliveries to the department.

I am happy to announce that we have now reached about 135 kilograms of cumulative production. We are encouraged that President Biden also highlighted our successful HALEU production in the recent speech. The President also noted that the United States has depended on imported fuel for too long, and expressed this commitment to making a multibillion-dollar investment to enriched uranium here in the U.S. Centrus is proud to be leading the effort to restore America’s domestic uranium enrichment capacity at scale. We are the only American-owned U.S. technology enricher. We are the only enricher who manufactures our centrifuges in the United States. We rely on American workers and the U.S. supply chain. Our Ohio plant is the only place in the Western world licensed for HALEU production.

It is one of just two sites in the United States that is licensed to produce low-enriched uranium for existing reactors, and the only one of those sites that is American-owned. We have barely scratched the surface of what’s possible in Piketon. Our facility is as large as the Pentagon with room for thousands of centrifuges. In addition to supplying HALEU for the next generation of reactors, we also could have an opportunity to produce and supply low-enriched uranium for the existing fleet of reactors. The LEU market is very large today. The enrichment component in the United States is worth about $2.4 billion annually at today’s prices. The accessible market internationally is currently about $1.9 billion per year. We’re also uniquely positioned to meet U.S. national security needs since those missions require the use of U.S. origin enrichment technology and we have the only U.S. enrichment technology that is deployment ready.

To be clear, scaling up production of either HALEU or LEU will require a robust public-private partnership. It will take a significant federal investment alongside private capital and commercial off-day contracts. Every other enrichment plant in the world is state-owned and has been built on the backs of similar partnerships from their supporting government. A robust federal investment is critical in leveling the playing field for an American producer. The good news is that we are taking steps towards building that kind of a partnership. In this quarter, Centrus submitted proposals to the Department of Energy in response to two RFPs as part of a program designed to stimulate HALEU production at scale by government purchases. We are looking forward to the Department’s decision later this year.

The RFPs contemplate up to $3.5 billion in long-term awards, which would include the cost of mining and milling the uranium, converting it to uranium hexafluoride, enriching it, and deconverting it to different forms. The Department has about $700 million in initial funding as part of the Inflation Reduction Act and, in March, with overwhelming support from Republicans and Democrats, Congress passed and the President signed new legislation that provided an additional $2.7 billion to jumpstart domestic production of both LEU and HALEU. We look forward to competing for this funding as soon as it becomes available and believe we are all well positioned to do so. The appropriations bill made the funding contingent upon either Congress or the President placing some additional restriction on imports of Russian uranium, which Congress did on April 30th.

The ban will be effective 90 days after the President’s signature, but it allows for a waiver process that runs through 2028 to allow time for new enrichment capacity to come online. We are engaging with policymakers on how best to implement an efficient and predictable waiver process. The prompt approvals of this waiver is critical not only to Centrus, but the entire U.S. nuclear industry. We’ve talked about the public side of the public-private partnership. Now, what about the private side? Here again, the private sector is stepping up. I am pleased to announce that over the last few months, Centrus has secured approximately $900 million in conditional sales commitments to support our effort to return to production of LEU. Subject to signing definitive contracts, these commitments are contingent upon Centrus securing sufficient public and private investment to build the LEU enrichment capacity.

They reflect the resolve of our customer base to support a new American producer of LEU that can bring greater competition to the marketplace and reduce our industry dependence on Russian nuclear fuel. And it shows that the private sector is ready to do its part as part of a national effort to restore America’s nuclear fuel supply chain. Between HALEU and LEU, we see a tremendous opportunity to address a large and critical market as the only publicly traded enrichment company, and the only company in the United States to hold necessary licenses to produce both HALEU and LEU. With that, I’m going to turn things over to Kevin.

Kevin Harrill: Thank you, Amir. Good morning, everyone. Our first quarter of 2024 results are in line with our internal projections for this quarter based on customer orders and deliveries. This quarter’s results are also consistent with the first quarter’s reporting over the past 3 years, which has included a smaller percentage of annual deliveries at lower margins. Additionally, the first quarter of 2023 included one higher margin delivery that did not repeat in the first quarter of 2024, although we expect a similar delivery later in the year. For the first quarter of 2024, our LEU business generated $23.6 million in revenue, a decrease of $35.2 million compared to the same quarter in 2023, reflecting decreases in both the volume of SWU sold as well as the average price of SWU sold.

Our cost of sales in LEU decreased from $34.9 million in the first quarter of 2023 to $23.1 million in 2024. Again, reflecting the decrease in sales volume of partially offset by an increase in the average unit cost of SWU sold. We ended the quarter with a modest LEU gross profit of $0.5 million compared to $23.9 million in the first quarter of 2023. The decrease in the LEU gross profit was partially offset by a $4.7 million improvement in the gross margin from our Technical Solutions segment compared to the first quarter of 2023. On a consolidated basis, our gross profit was $4.3 million, a decrease from $23 million in the same quarter last year. In Technical Solutions, we generated revenue for the first quarter of $20.1 million with cost of sales of $16.3 million.

That compares to revenue of $8.1 million against cost of sales of $9.0 million in the same quarter last year. As Amir noted earlier, we have transitioned to Phase 2 of the HALEU operation contract and, with that, transitioned to a cost-plus-incentive-fee model, which has improved the profitability of that segment. We ended the quarter with a cash balance of $209.3 million and an additional $32.6 million in restricted cash, for a total of $241.9 million of cash and restricted cash. Our strong cash position continued to enable us to manage our operational obligations and make strategic investments in our future. With that, let me turn things back over to Amir.

Amir Vexler: Thank you. Before we get to your questions, I want to offer a bit of a context about the environment we are in. I’ve spent more than 25 years in the nuclear fuel industry. I’ve never seen the market change as dramatically as it is changing now. As industry and policymakers come to term with the new technological and geopolitical realities and race to catch up. The COVID pandemic offered a stark warning about the importance of supply chains. The Ukraine invasion sparked concerns over Russia’s dominance in the nuclear fuel market, causing market prices for enrichment to triple. Meanwhile, a whole new generation of reactors is coming to market. Many of them will require HALEU and will use them for a lot more than just electricity.

They have the potential to provide high temperature heat for industrial processes, like making cement or steel or desalinating water. Google and Microsoft are exploring deploying these new reactors to provide 24/7 power to the vast new data centers that will be needed for AI systems. And next year, the U.S. military will test the prototype of a HALEU-fueled microreactor to meet the needs of our troops and military bases. Recognizing the surging need for clean energy, last year the United States joined with two dozen countries on four continents in a pledge to triple nuclear energy generation by 2050, and joined a subsequent declaration with our closest allies in committing to support new enrichment capacity needed to meet this goal. As a company and as a country, we have a once-in-a-generation opportunity to reclaim American leadership in uranium enrichment.

It was a mistake for the United States to cede this market to others. It’s time for us to get back in the game, but we can’t do it without you. So let me close by expressing my gratitude to our investors, who are supporting us on this journey. We expect to accomplish great things together. With that, we’re happy to take your questions. Operator?

Operator: Thank you. [Operator Instructions] Our first question is from Rob Brown with Lake Street Capital. Please proceed.

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Q&A Session

Rob Brown: Good morning.

Amir Vexler: Good morning, Rob.

Kevin Harrill: Good morning.

Rob Brown: I just wanted a little more color on the $900 million of LEU kind of contingent commitments, and what that entails and what that means for the marketplaces?

Amir Vexler: Well, good morning, Rob. I’m actually glad you posed that as your first question. I think that’s probably one of the most important things in our discussion today. It’s different from past orders, obviously, and the way it’s different from it, this is actually meant for production in our facility in Piketon. So these are LEU, this is material that will be produced by us. Now, obviously, as we said, it’s contingent, contingent on several factors. And probably the biggest factor is, as we have been prepping everybody in the past, we are seeking a public-private partnership, and it’s contingent upon an actual materialization of that and the build of the facility. So the way to read this correctly is that the market and the commercial utilities are really seeking fairly aggressively another competitor in the market.

And they’re looking to Centrus to be that competitor. And so we do view it as a huge step forward, very positive news, and a very good indicator from the market to accomplish really what we’re set to do here, become a producer. I hope that answers your question.

Rob Brown: Yeah, exactly. That was perfect. Thank you. And then second question is really on the HALEU incentive, the $2.7 billion, and I know there’s some moving pieces here, but how do you see that playing out when that gets the Russian ban? Does that then start to move forward through a separate RFP process? Or how do the steps kind of play out at this point?

Amir Vexler: Yeah. So, I think we kind of prepped the investment community for that earlier as well. It’s been communicated that in order for the $2.7 billion federal investment to be unlocked. The ban on Russia has to be put in place, which it was. And so that really unlocks a significant amount of funding, which is going to flow through the DOE to the industry, and Centrus is very well-positioned to be a major player in this. As you know, the intent for the $2.7 billion in funding is to stand up a supply chain for fuel, a reliable supply chain here for fuel, a supply chain that we’ve ceded to others, predominantly to Russia. And with our successful demonstration in October, where we demonstrated our ability to enrich, as I said, I think that positions us extremely well in this competition for the $2.7 billion. Now, how it’s going to be divided, and in what manner, nobody really at this point knows it would be DOE decision.

Rob Brown: Got it. Thank you. I’ll turn it over.

Operator: Our next question is from Alex Rygiel with B. Riley Securities. Please proceed.

Alex Rygiel: Thank you. Good morning, gentlemen, and exciting times here, a lot going on for sure. First question here, as it relates to the enrichment ban, or the uranium ban, importation ban, any early insight into the waiver process and the timeline there, sort of who’s applying for the waivers, or you or your customers, and how urgent is that need for these waivers?

Amir Vexler: Well, the TENEX supply contract is our largest source of supply of low-enriched uranium that we deliver to the customers. We’ve been very clear in our filings that an immediate cutoff absent a waiver would have a material adverse effect on our business and financials, not only to us, I mean it would be extremely disruptive to the entire U.S. nuclear industry and this is the reason why there’s a provision for a waiver. For the past few months, we have been providing input and working with industry groups and providing input to the right stakeholders as to how the process should be and how it should work. We, obviously, have all the intentions to apply for a waiver at the first opportunity and really the bottom line here is that we believe that the case for waivers is very strong and in a national interest.

So to answer your question, yes, we’ve been preparing, we’re going to make use of this process and it is extremely important not only to Centrus, but to the industry here in the U.S.

Alex Rygiel: Thank you. And then, as it relates to your current production here regarding HALEU. Is the DOE supplying you with a consistent stream of cylinders yet, if not, kind of about what time of the year do you anticipate that the supply of cylinders will meet your production?

Amir Vexler: Right, right. So, it’s a situation that we monitor and we report the progress on these calls as well. And so, Centrus anticipates that the delays in obtaining the 5B cylinders is this temporary. We have a line of sight to when the cylinders should be more consistently available and really we expect the problem to be fully resolved this fall. So, again, it’s a temporary issue. Now that the supply chain is picking up, we fully expect it to be resolved this fall.

Alex Rygiel: Thank you.

Operator: Our next question is from Joseph Reagor with Roth MKM. Please proceed.

Joseph Reagor: Hey, Amir and team. Thanks for taking the questions. So kind of following on the question about the waivers. Let’s just say that it would have an adverse effect, but from a standpoint of like investors kind of fully understand that, hypothetically, if there was any period of time during which you had to deliver without a waiver, would that mean that the contracts would be canceled or would it mean that you would have to buy in the open market or would it be a combination thereof?

Amir Vexler: Well, first before I dive into answering the question, I just want to make something really clear just in case folks are not following the news is that the ban has not been implemented before. I mean, it’s in front of the President for signature. I mean, we do expect that to happen, just it’s a technicality, but it’s not really in place yet. That’s one point. In terms of how our contracts are structured and what recourse we have, we really are working on and have been working on contingency plans, even beyond the waiver. There are things that we’ve been working together with our customers, with our suppliers. I will not get into a lot of details that reflect our contractual T’s and C’s, but we are working on contingencies beyond that. I mean, this is really our job as a leadership team here.

Joseph Reagor: Okay. Fair enough. And then beyond that, have you guys seen any uptick in requests for deliveries from your customers, because they don’t want to deal with the complication, let’s say, get signed soon in the 90-day starts. When that’s over they don’t want to have like a window where it’s complicated. So have you seen any uptick in the last few weeks and then, saying, yeah, we want to take a delivery before this becomes an issue?

Amir Vexler: No, we have not seen that in the time period that you quoted. No.