Centrus Energy Corp (LEU) 2021 Q1 法說會逐字稿

Greetings and welcome to Centrus Energy's First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I would now like to turn the conference over to your host, Dan Leistikow, Vice President, Corporate Communications. Thank you. You may begin.

Good morning. Thank you for joining us. Today's call will cover the results for the first quarter of 2021 ended March 31. Here today are Dan Poneman, President and Chief Executive Officer; Philip Strawbridge, Senior Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer; and John Dorrian, 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 quarterly report 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 of the 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 12, 2021, unless otherwise noticed.

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 Dan Poneman.

Thank you, Dan, and thank you to everyone on the call today. I am pleased to report that after returning to profitability in 2020, Centrus Energy had a strong and profitable first quarter of 2021. We saw total revenue of $55.6 million and posted a net profit of $5.1 million through the first 3 months of the year. As always, we could not have done this without the hard work and incredible talent of our employees. I am so proud of all that we have accomplished together, particularly under the unique challenges presented by COVID-19.

We continue to work through the challenges presented by the pandemic and the ongoing realities of quarantine, including extensive telework, masking and social distancing. We have been making our customer deliveries without interruption and benefit from the fact that most of our revenue comes from stable long-term contracts.

We are also making tremendous progress toward completing our 3-year $115 million contract with the U.S. Department of Energy to build and to deploy a cascade of our AC-100M machines. These centrifuges will demonstrate production of a next-generation nuclear fuel called high-assay low-enriched uranium or HALEU in early 2021, making it the first NRC-licensed HALEU production facility in the United States, a major milestone in the restoration of American nuclear leadership on the world stage in support of the next generation of advanced nuclear reactors.

While the pandemic has had some impact on our manufacturing supply chain, we are working through those challenges and expect the project to finish on time. As you know, HALEU is an enriched uranium fuel with a higher enrichment level than the standard low-enriched uranium that powers most commercial reactors today. Because it has a higher concentration of fissile isotope uranium-235, HALEU allows for better fuel utilization, smaller fuel cores, reduced volumes of waste and a number of other advantages for reactor economics and performance.

We've talked a lot about the Department of Energy's Advanced Reactor Demonstration Program, or ARDP, over the last few months. 9 of the 10 reactor designs selected under that program, including the 2 major demonstrations, are expected to operate on HALEU. HALEU is particularly well suited for microreactors because it allows for fuel cores that are physically smaller, but which can last for many years or even decades at remote locations. Some of these reactors may even be transportable.

The U.S. Department of Defense, for example, has a program called Project Pele, which aims to build a prototype HALEU-fueled mobile microreactor within 3 years. The U.S. Department of Energy also is working to build a HALEU-fueled microreactor at Idaho National Laboratory within 2 years called MARVEL.

The goal is to help accelerate microreactor development by giving designers a platform to test and to demonstrate their technologies. While the capacity of microreactors is, as the name implies, smaller than other reactors under development, even a modest deployment of microreactors, whether for military or civilian use, could result in a large demand for HALEU.

The HALEU production capacity we are building as part of the demonstration program will be modest, but we have a modular deployment model. Subject to the availability of funding or offtake agreements, we are ready to expand the capacity of the facility to meet any level of HALEU demand.

As we noted in our annual shareholder letter, the International Atomic Energy Agency released an estimate at the end of last year that global nuclear power generation could increase by 8% to 39% over the next decade and could more than double by 2050.

Rising demand tends to mean rising prices for fuel, which is exactly what we have been seeing over the last 3 years. Since reaching their lowest point in August of 2018, spot prices for enrichment measured in dollars per separative work unit, or SWU, have increased by over 55%. More utilities have come back into the market to secure their fuel supply for future years.

Also, as we noted in our annual 10-K filing, we had particularly strong sales activity from November through the end of January with more than $100 million in new sales commitments. As of the end of the first quarter, the value of our long-term order book rose to about $989 million, a $29 million increase from the end of 2020.

Now for more details on the quarterly financial results, I will turn the call over to Philip.

Thank you, Dan, and good morning to everyone. As Dan mentioned, for the first quarter of 2021, we had total revenue of $55.6 million and achieved a net profit of $5.1 million.

Revenue for the LEU segment increased $7.4 million compared to the same quarter in 2020. Cost of sales for the LEU segment increased $12.1 million in the 3 months ended March 31, 2021, compared to the corresponding period in 2020, primarily due to increased volume. Excluding legacy costs and previously deferred sales, the average unit cost of sales for SWU decreased 14% in the quarter compared to last year.

As we've mentioned before, we tend to see variability from quarter-to-quarter because of our customers in the LEU segment generally have multiyear contracts with purchase obligations that are annual, not quarterly. The customer decides what month to take their annual purchase commitment and then the quarter when -- we report in that quarter that we record the revenue. Some quarters look worse because we have fewer deliveries, while others look better because we have more deliveries. Another source of variation is the fact that some contracts were signed on prices were higher than they are today, and others were signed when prices were lower. So a quarter can look better or worse depending upon the price points of a particular contract that we're delivering in that quarter.

Our Technical Solutions segment received increased -- revenue increased $3.2 million in the first quarter of 2021 as compared to the same period in 2020, reflecting increased work performance of the HALEU and X-energy contracts. Cost of sales for this segment increased $6.4 million in the 3 months ended March 31, 2021, compared to the corresponding period in 2020, reflecting the increase in contract work performed.

Now I'd like to talk a little bit about our SG&A costs. In the first quarter of 2021, our SG&A decreased by $300,000 compared to the same period in 2020. That was in spite of a $1.2 million increase in incentive compensation expense, primarily related to the remeasurement of obligations under our long-term incentive plans, which are based on the price of our stock. We were able to more than offset that increase by cutting back in other areas, including a $1.1 million reduction in consulting costs. We'll continue to look at opportunities to reduce our SG&A costs as we have over the last several years.

As far as cash, we ended the quarter with a strong consolidated cash balance of $163.3 million.

I'm sure that some of you may have noted that even with the net profit, we showed a net loss allocable to common shareholders of $2.2 million or $0.17 basic and diluted per common share under GAAP. That was the result of an exchange of common for preferred shares. Without giving effect to that exchange, on a non-GAAP basis, the adjusted net income per share was $0.34 basic and $0.33 on a diluted.

Now I'm going to turn the call back over to Dan.

Thank you, Philip. As usual, let me offer a final thought about the importance of the nuclear industry moving forward. The demonstration program that we're all working so hard to complete to demonstrate production of this new HALEU fuel has been a challenge, but an exciting one for the company. And early next year in 2022, we are very much looking forward to seeing, for the first time in several years, the United States of America actually producing not only in risk training but this new form that is potentially the enabler of the entire fleet of advanced generation reactors that is now under development. So 2022 is a red letter date for this company.

But beyond that, there have been several promising developments for industry in the last several months writ large. For example, the Biden administration's American Jobs Plan specifically mentioned advanced nuclear reactors and fuel as part of efforts to jump-start clean energy manufacturing through federal procurement. Significant efforts are also underway to sustain the existing fleet of commercial reactors, which contribute 1/5 of our nation's power but over half of our carbon-free power.

Unfortunately, energy markets don't recognize the full value either of the resilience of this always-on power source or its tremendous contribution to our climate goals. So serious consideration is now being given to proposals that provide for tax credits for the nuclear industry similar to those that have supported the expansion of renewable energy sources like wind and solar for many years. We don't know yet what might come of these discussions, but it is encouraging to hear a rising support for the largest carbon-free energy source currently available.

The updated country commitments to reduce global emissions will require nuclear energy to meet the growing need for reliable carbon-free electricity. We stand ready to meet these needs through the work of both of our business segments and are optimistic about the future of the nuclear industry and about our role as a trusted fuel supplier.

Once again, I want to thank all of you for joining the call, and more importantly, for the trust and confidence that you have put in Centrus. We look forward to continuing to build value for you, for the U.S. nuclear industry and for the country.

Operator, We'd be happy to entertain any questions at this time.

(Operator Instructions) Our first question comes from the line of Rob Brown with Lake Street Capital Markets.

My question is on kind of the environment for utility activity. You mentioned a number of new orders kind of coming through. How is that playing out as you go through the year? And is there anything driving that or is it just sort of the timing on the reorder cycle?

Well, there's -- Rob, the question, there's a number of factors. While the market was in a secular decline, recall that basically from 2011 till August 2018, there was a lot of demand withheld from the market. When you think of it from the perspective of the fuel buyer, if the price of the SWU is at $60, you buy at $60, it doesn't look so good if you then see the price go to $50. So one dynamic is that as prices are rising, the utilities would get the deal sooner rather than later, right? And so that's one factor.

Another factor is during that long period at which they were keeping demand off the market, what they were doing was working down inventory. So the cushion, so to speak, of them being able to kind of stay out of the market also has gone down. So I think it's really that combination of factors, and frankly, an overall bullishness that people expect the prices may continue to rise and in an environment of rising prices in a commodity that does not spoil with age like nuclear fuel, there are incentives to get into the market and make a purchase.

(Operator Instructions) Our next question comes from the line of Richard Fels with Odeon Capital Group.

I have two questions. So on the last several calls, we've alluded to the American Jobs Plan and previously to the Energy Act of 2020, where they specifically start to outline that we should, in the U.S., start up uranium mining, which we haven't done since 2013. Can you guys enlighten us on who were the uranium miners in North America or in the U.S.? And are you talking to anyone that may be in the process of opening up uranium mining? I'm not sure who they were in the past.

Okay. Let me -- just to make one -- first of all, thank you for the question, Richard. One clarification. I think the thing that we have often said is that there's been no uranium enrichment since 2013 when the predecessor to this company shut down the last of the old gaseous diffusion plants in Paducah, Kentucky. But on the mining thing, there are a number of U.S. mining companies, Energy Fuels, Ur-Energy, UEC and there are other entities such as Cameco that may have foreign headquarters, but have properties in the U.S.

So I think those are the mines that, given the right kind of demand signal, you will see some additional production coming out of them. And there's been a whole strong interest from a strategic standpoint that you've seen reflected both in the Congress and in the administration to view that uranium resource base as strategically important to the future of the country and to the energy sector.

So for example, in April 2020, there was this Nuclear Fuel Working Group report that talked about setting up a uranium reserve that would include not just natural uranium mining, but also the next step in the chain, the value chain, which is the conversion step. That fund -- that reserve was funded at a level of $75 million in the last budget cycle and -- to get that thing started. And one thing that people are waiting to see is when the new budget comes out, which of course, has not happened yet, to see what happens in the next budget cycle in terms of funding that uranium reserve. If that thing gets up and running, then you will, in fact, see a resumption of additional production of uranium from U.S. mines, which has fallen to very low levels compared to what it once was.

(Operator Instructions) We do have another question from the line of Richard Fels with Odeon Capital Group.

Yes. I think I got cut off. Thank you for that explanation. Any domestic production should benefit LEU, I would think?

Well, when you say LEU, I think you're referring to the ticker, not to the commodity, right? So...

Correct.

Let me put it to you this way. And I guess now that you say that, I think I might not have answered every jot and tittle of your earlier question. Look, we are -- we, Centrus, possess the only U.S. origin enrichment technology that is ready to deploy, period, full stop, right? And why that's important for the U.S. miners is that means that Centrus is uniquely able to satisfy national security missions. A lot of -- well, not a lot, the rest of the uranium enrichment available comes from foreign sources and there are legal and policy constraints on using foreign origin enrichment, as you can easily imagine, for a national security mission. We use enriched uranium ultimately to supply highly enriched uranium for reactors that go into aircraft carriers and submarines. And we actually need as a country to have low-enriched uranium that's unobligated, that means from a U.S. technology base, which we uniquely possess for the production of tritium, which is needed continuously to replenish the reservoirs of tritium in our actual nuclear weapons.

And any enriched uranium that we produce for that must also come from domestically mined uranium that's converted in a U.S. conversion facility. So any time you were talking about LEU that -- or for enriched uranium at all that's used for national security purposes, that creates an inherent demand-pull signal for natural uranium as well as U.S. conversion as well as U.S. enrichment. And for that reason, there is indeed a strong alignment of interest for those who like to see the United States get back on the world stage and to recover this lost leadership that we used to enjoy in such an unchallengeable way. It's a good news signal when we see that kind of focus on any element of the supply chain because each one reinforces the other.

Our next question comes from the line of Rob Brown with Lake Street Capital Markets.

I just wanted to follow up on the Tech Solutions business and really the DOE project. Could you remind us the time line there and when the demonstration HALEU is produced? And then maybe your thoughts on the next steps on how that -- where that project goes from there?

Yes. Thanks, Rob. So we -- as I mentioned, it's been really tough because the supply chain has had challenges because of COVID. But thankfully, we actually are on track and we've been working very well with our regulators. And we have all 16 machines now for the demonstration cascade up and standing in Piketon, Ohio. We're doing the finishing work on all the EPC work, et cetera, et cetera. And we expect in due course to have an NRC license that will enable us to actually begin operations early next year, early 2022. So at that point, we will have a capacity to produce on the order of, if you just kept running the cascade, like 1 metric ton over the course of about a year. But we don't -- as I've mentioned, we don't have, at this point, a program rolling forward after that program concludes.

So once -- to your second part of your question, once we actually demonstrate this capability and deliver the sample of actual 19.75% HALEU to the U.S. Department of Energy, the next step would be to hopefully expand this cascade. And that's important, not only for us, but frankly, it's important for the entire fourth generation industry because as we've mentioned several times 9 out of the 10 reactors that received awards under the Advanced Reactor Demonstration Program do require HALEU fuel and we will be the only U.S. source for that fuel.

And so if one is bullish on that Advanced Reactor Development Program (sic) [Advanced Reactor Demonstration Program], then it's going to be very important for us to expand as rapidly as possible to satisfy the emerging demand for that new tranche of reactors. And that's, frankly, I think, well reflected in the Energy Act of 2020, which calls on the department to make sure that there is HALEU available for that purpose by 2026.

(Operator Instructions) Our next question comes from the line of Richard Fels with Odeon Capital Group.

Okay. So he keeps putting me on mute. Thank you for the color on my first question. It's very helpful. And my second question is what are the plans for the growing excess cash? How are you planning on using that, returning it to investors? Any thoughts there because it's certainly more than enough to operate the business.

Thank you, Richard. So I'll start this and then I'll, I think, ask Philip to augment. So we have, as you'd imagine, a continuous process of -- continuous analysis of our cash position and continuous analysis of the highest and best uses of those resources. It's been, frankly and obviously, a very good thing for us to have this strong cash position. And the options include everything from looking for further ways to strengthen our capital structure. We have found a lot of benefit in the steps that we've taken so far, as you're well aware, to we -- as you know, we had that initial major tender offer that reduced our overall debt load by 60% and extended our maturities out to 2027. We had the tender offer for the preferred and other preferred transactions besides.

Each one of these things has put the company in a better position. And that's important because all of the things that we want to do moving forward on both the LEU side of the business and the Technical Solutions side of the business benefit from us being in a stronger financial position overall. And whether we use it for those or whether we use the resources for added investment in some of these exciting new technological developments that may help generate stronger revenue streams rolling forward is, as I said, an analysis that we very actively continue from a management perspective. And of course, we keep our Board very much apprised and they provide the ultimate oversight for the strategic use of our cash resources.

But Philip, could I turn to you for a further color?

Yes. Dan, I think you said it well. Actually, as you know Richard, we've been active, as Dan mentioned, and certainly looking at both the preferred and debt as well as invest in the business. But you're right, I mean we've got a very strong cash position, so we want to make sure that we utilize it properly.

And with that, since there are no further questions, I would now like to turn the call over back to Mr. Leistikow for any closing remarks.

Thank you, operator. This will conclude our investor call for the first quarter of 2021. I want to thank all of you who called in or listened online. We look forward to speaking with you again next quarter.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.