Centrus Energy Corp. (LEU) Q2 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Centrus Energy Second Quarter 2020 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Leistikow. Please go ahead, sir.

Good morning. Thank you for joining us. Today's call will cover the results for the second quarter 2020 ended June 30. Here today for the call 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'd 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 is accurate only as of today, August 5, 2020, 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 will now turn the call over to Dan Poneman.

Thank you, Dan, and thank you to everyone on the call today. As we discussed on our last call, even as the COVID-19 pandemic has strained the broader economy, Centrus is fortunate that the vast majority of our revenue is tied to stable long-term contracts with large entities like electrical utilities and the U.S. government. We have not had any interruptions in our nuclear fuel deliveries to our customers in the United States and around the world, and we expect that we'll continue making those deliveries as planned in the months and years ahead. The health and safety of our employees is our highest priority. So we are taking all necessary steps to protect them, including through extensive telework wherever possible. A portion of our workforce at our secure facilities in Tennessee and Ohio are unable to telework. So we have implemented temperature checks, strict social distancing measures, mask requirements when in close proximity and increased deep cleaning to protect those employees. We also recognize that expanded telework requires us to take additional measures to protect against potential vulnerabilities in our systems and communications, and we have done that. This was another strong quarter for Centrus, not only in the bottom line results, but also in terms of the progress we are making in executing our strategic plan to grow and diversify our business. Centrus reported $75.7 million in total revenue and net income of $33.7 million for the second quarter. That strong result was primarily driven by a settlement of a claim we made in a customer's bankruptcy proceeding. It's a significant improvement over the second quarter of 2019 when we saw a net loss of $15.6 million. As always, however, I do want to caution that our revenues and results tend to vary considerably from quarter-to-quarter. Our long-term customers in the utility sector have annual purchase commitments, not quarterly commitments. They can take delivery of that annual commitment at whatever point in the year they choose, and that's when we recognize that revenue. In some quarters, we have more deliveries than in others, and the pricing of those deliveries can vary quite a bit. We continue to focus on reducing our supply costs. The price reset provision that went into effect at the beginning of last year and our largest supply contract has lowered the average unit cost we pay for enrichment. That's been a significant driver in 2 consecutive quarters of positive net income. We ended the quarter maintaining a long-term order book in our LEU segment valued at approximately $1 billion, which includes approximately $300 million in deferred revenue. Let me say a few words about the Russian Suspension Agreement, or RSA, as we call it, which is a trade agreement between the United States and the Russian federation that currently limits imports of nuclear fuel from Russia to about 20% of the U.S. market. Those limits were scheduled to expire at the end of 2020. As we discussed on our last call, the U.S. Department of Commerce is conducting an administrative review of the RSA. We import enriched uranium from Russia under our largest supply contract, which runs through the late 2020s, so we could potentially be affected depending upon the outcome of the proceeding. One of the core issues in the administrative review is whether the RSA should be terminated early, and early termination would restart a decades old trade investigation that could impose very high duties on imported Russian enriched uranium. As described in the 10-Q, if duties are imposed on Russian uranium, it would be commercially impractical for Centrus to continue importing Russian enriched uranium, which could result in significant adverse financial consequences for the company. As an alternative to imposing duties, the department is seeking a significant extension of the RSA, including agreeing with the Russian federation to extend the import limits past their scheduled expiration at the end of 2020. If the commerce department and the Russian federation agree to extend the RSA as we hope they do, there will be no investigation, which will avoid the risk of duties. Even if the RSA has extended, the key issue is, how existing contracts with American companies will be handled, including Centrus' supply contract and many other contracts that U.S. utilities has signed directly with the Russian supplier. And whether the quota will be set at a level that allows for all of those existing contracts to be honored. Currently, we have a quota allocation from our Russian supplier that allows us to sell most of our purchases in the United States. That allocation expires at the end of 2020 when the import limits were set to expire. Our position has been that under any extension of the RSA beyond 2020, all existing contracts with American companies, including Centrus contracts should be grandfathered and protected by allocating sufficient quota to those contracts to ensure that imports can continue under them. The negotiations are confidential. In a letter to Congress this June, however, the Department of Commerce stated that during the RSA negotiations, the department was seeking to protect the commercial interest of U.S. parties whose contracts for post-2020 imports were already in place at the time the negotiations over the potential extension began in early 2019. Our supply contract was in place long before that date. In fact, we signed it way back in 2011. We have, therefore, asked that our contract be included among those that commerce is working to protect. We have been working on contingencies to mitigate the near-term impact if the parties are unable to reach such an agreement. That being said, failure to reach such an agreement on an extension would severely impact the entire U.S. nuclear industry and not just Centrus. Thus, we believe that it is in everyone's interest to reach an agreement on an extension that protects existing contracts, and we are hopeful that agreement can be reached soon. Now let me turn to our Centrus Technical Solutions segment, where our incredibly talented team has been making steady progress on the 3-year $115 million contract we have in place with the U.S. Department of Energy. Under that contract, we are building a cascade of centrifuges that will demonstrate production of a next-generation nuclear fuel called high assay, low-enriched uranium or HALEU, as we call it. HALEU is uranium that has been enriched so that the concentration of the fission isotope uranium-235 is up to nearly 20% compared to the 4% to 5% concentration that is typically used in existing nuclear reactors. The higher concentration of uranium-235 in HALEU allows for smaller fuel cores, better fuel utilization, reduced volumes of waste and a variety of other advantages that will bring better performance, even stronger proliferation resistance and improved economics to the next generation of advanced reactors around the world. Those attributes are so attractive to the industry that a number of companies are now working to develop HALEU-based fuels for our existing fleet of reactors as well. And in addition to the commercial potential of HALEU, the U.S. Department of Defense has also launched a program called Project Pele that aims to demonstrate a HALEU-fueled mobile microreactor that could easily be transported, employed at remote bases or used to assist with disaster response. The problem for the nuclear industry is that despite the great promise of HALEU, it isn't commercially available today from western suppliers. And without an assured American source of HALEU, it will be a significant challenge for American reactor developers to market these next-generation reactors at home or abroad. That is precisely the problem we are working to solve as part of our contract with the U.S. Department of Energy. We have already submitted our application to the U.S. Nuclear Regulatory Commission to become the only American facility licensed to enrich uranium up to 20%, and the NRC has now accepted our application and launched its formal review of that application. Construction activities are on track, on schedule and on budget. We have not experienced delays as a result of the pandemic, but we can't rule out the possibility in the future. And as I said at the outset, protecting the health and safety of our employees is our paramount concern. We will continue to work with the U.S. Department of Energy to minimize any impact to the cost or schedule of the program as we move forward. The demonstration should be completed in early 2022 and could then transition to commercial production. While the fuel requirements of advanced reactor designs vary quite a bit. The demonstration cascade will have enough capacity to support 1 to 3 small reactors. And most importantly, we can expand that cascade in modular fashion as demand for HALEU expands. The facility in Piketon, Ohio is large enough to accommodate thousands of centrifuges if necessary, enough to support a fleet of dozens or even hundreds of reactors if the market goes in that direction. We are also uniquely positioned with the only deployment-ready U.S. enrichment technology that is suitable for national security missions. Under long-standing U.S. policy and binding nonproliferation treaties, the use of foreign origin uranium or foreign enrichment technologies for national security purposes is prohibited, which means that an American technology, like the one we have developed, will ultimately be needed to meet America's long-term national security requirements for enriched uranium. Those requirements are currently met from the existing stockpile of highly enriched uranium left over from the cold war. But the U.S. Department of Energy has said that a new domestic enrichment capability will be eventually required for missions like maintaining the Tritium supplies needed to support our nuclear deterrent and fueling our nuclear navy. Centrus stands ready to meet those requirements when the need arises. 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 on the call. As Dan mentioned, for the second quarter of 2020, we had total revenue of $75.7 million, including $63.4 million from the LEU segment. The LEU segment revenue includes $32.4 million collected from claims filed with bankruptcy court. Excluding those proceeds, revenue from LEU segment increased by $26.2 million in the second quarter compared to the same quarter last year. That variation reflects the dynamic, Dan discussed a moment ago. Prices and volumes can vary significantly from quarter-to-quarter depending upon how our customers choose to time their annual purchase commitments over the course of the year. Cost of sales for the LEU segment increased to $11.2 million in the second quarter of 2020 compared to the same period in 2019. Our Technical Solutions segment revenue and cost of sales increased by $4.3 million and $5.8 million, respectively, compared to the same quarter in 2019. This reflects the mix of Technical solutions work performed in each of the periods, including more performed under the HALEU contract discussed above in the current period. Now I'd like to talk about our SG&A costs. This quarter, our total SG&A was up compared to the same quarter last year. However that was primarily driven by a $2 million write-off of capitalized cost that had accrued over the past several quarters associated with their capital structure. In addition, we incurred about $800,000 of stock-based incentive compensation expense related to the significant increase in our stock price. We also incurred $1.2 million in the 6-month year-to-date pursuing the settlement that we talked about that we secured in the bankruptcy court. We will 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 second quarter of 2020 with a consolidated cash balance of $119.3 million. Because operating results and cash flows vary from quarter-to-quarter, results for this or any other quarter are not necessarily indicative of the results that may be expected for the year. As we have indicated, when we filed our 10-K, we, like many other companies, are not providing annual earnings guidance. Now I'll turn that back over to Dan.

Thanks, Philip. Before we close, I would like to highlight some other interesting developments in nuclear energy. In addition to Project Pele, which I mentioned earlier, the U.S. Department of Energy is now taking applications for the Advanced Reactor Demonstration Program. And plans to fund the deployment of 2 first of a kind advanced reactors in the next 5 to 7 years, laying the groundwork for the potential commercialization of those reactor designs. This program reflects the strong commitment of the Department of Energy and a bipartisan coalition [ in its numbers ] to the future of the advanced nuclear industry. And the belief that America can and should lead the transition to the next-generation of reactors. Many of these new designs will require HALEU, and Centrus is proud to be on the vanguard of that effort. This is a pivotal moment for America's nuclear future. Our energy security, national security and climate objectives can all be powerfully advanced by the successful deployment of advanced generation nuclear reactors. All of us at Centrus are excited to be part of this moment and to this great venture that holds so much promise for our generation and for those that follow. Operator, we'd be happy to entertain any questions at this time. Thank you.

[Operator Instructions] Sir, it would appear that we have no questions in the conference call. I would now like to turn the floor back to Dan Leistikow to conclude comments.

Thank you. Since there are no questions at this time, this will conclude Centrus' Second Quarter 2020 investor call. I want to extend a thank you to our listeners, and we look forward to speaking with you again next quarter.

Thank you very much. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect your lines at this time.