Centrus Energy Corp. (LEU) Q3 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Centrus Energy Third Quarter 2020 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]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Dan Leistikow, Vice President, Corporate Communications for Centrus Energy. Thank you. You may begin.

Good morning. Thank you for joining us. Today's call will cover the results for the third quarter of 2020 ended September 30. 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 I turn 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, 8-Ks are available on our Web site. A replay of this call will also be available later this morning on the Centrus Web site. 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, November 13, 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 have discussed in previous calls, the health and welfare of our employees and their families is our paramount concern. The pandemic has certainly forced us to change the way we do our work in order to protect our people. Fortunately, it has not taken away our ability to deliver on our customer orders and we expect to continue making those deliveries as planned in the months and years ahead. Indeed, Centrus is fortunate in that the COVID-19 pandemic does not affect our revenue in the way that it does for direct to consumer businesses. Nearly all of our revenue comes from stable, long-term contracts with utilities and the U.S. government. This was another exciting quarter for Centrus. We launched a public offering, raising about $25 million before expenses. We also announced a cash tender offer to purchase up to $60 million in Series B senior preferred stock. I can't go into much detail on that because the tender offer is still open, but we are optimistic about what the future holds. Our long-term order book in our low-enriched uranium or LEU segment remains at about $1 billion, which includes about $300 million in deferred revenue. In terms of financial results, Centrus reported $33.6 million in total revenue and a net loss of $7 million for the third quarter. That is a significant variation from last quarter, unfortunately, but those of you who regularly tune into these quarterly calls know, because you've heard me repeat it many times, that quarter-to-quarter variations are expected and reflect the timing of when we make deliveries. What matters is the annual performance, not what happens in any one quarter. That is why we are pleased that the long-term trend in the market remains positive. Spot prices for enrichment measured in dollars per separative work units, or SWU, have increased by almost 50% since bottoming out in August of 2018. As the price has continued to climb, more utilities have gone back into the market to secure their fuel supply for future years. So, we expect to have strong selling opportunities moving forward. Long-time listeners to our quarterly calls have also heard us discuss the Russian Suspension Agreement, a trade agreement between the United States and Russia that places limits on the amount of Russian nuclear fuel that can be imported. As many of you know, we faced a significant risk to our largest supply contract as the U.S. Department of Commerce worked to extend those import limits past the end of this year when they were scheduled to expire. I am pleased to report that this issue has now been resolved. While the import limits have been extended, the agreement signed between the two governments on October 5 expressly allocates a portion of the allowable imports to Centrus. While the exact quantities set aside for Centrus are confidential, we expect that they will give us what we need to achieve the goals of our strategic plan and to continue to serve our customers. This has removed a significant source of uncertainty in the market and helped to solidify an important source of revenue for us as we go forward. Turning to our Centrus technical solutions segment, our incredibly talented team continues making steady progress on the three-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. The standard low-enriched uranium fuel, or LEU, that powers our existing fleet of commercial reactors is enriched to a concentration of the physical isotope U-235 of a little less than 5%. HALEU is further enriched so that the U-235 concentration is between 5% and 20%. The higher concentration of U-235 in HALEU allows for smaller fuel cores, better fuel utilization, reduced volumes of waste and a variety of other advantages. There is growing interest in HALEU, both as an upgrade for existing reactors and to fuel a new generation of advanced reactors. The challenge is that HALEU is not commercially available today from Western suppliers, which makes it hard for U.S. advanced reactor developers to market their new designs to prospective customers. With the help of our contract with the U.S. Department of Energy, Centrus is working to solve that problem for the industry. We intend to be the first to market with commercial HALEU production under license by the U.S. Nuclear Regulatory Commission and we are well on our way. Construction activities are on track, on schedule and on budget. While we have experienced issues with some of our suppliers as a result of the pandemic, we have been able to remain on schedule and on budget for the project. Of course, we cannot rule out that possibility that the continued effects of COVID may change that in the future and as I said at the outset, protecting the health and safety of our employees is always our paramount concern. That said, 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 we can 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 one to three small reactors, and we can expand in modular fashion as demand for HALEU grows. 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 a robust market for advanced nuclear energy develops as part of our efforts to assure the resilience and security of the electric grid upon which we all depend for every facet of our lives as well as our intensifying efforts to combat climate change. In October, the Department of Energy announced the two winners of the Advanced Reactor Demonstration Program, or ARDP. We are proud to report that we have strong relations with both winners, TerraPower and X-energy. We have been working with X-energy since August 2017. And just two months ago, we announced a collaboration with TerraPower to work together to establish commercial scale, domestic production capabilities for HALEU to support their innovative new reactor. We also signed a Memorandum of Understanding with Terrestrial Energy to secure fuel supply for a future fleet of Integral Molten Salt Reactor power plants. Together, these announcements suggest a lot of exciting things that are coming for advanced reactors and the next-generation fuels needed to power them. And of course, we're continuing to work on developing other opportunities to promote advanced reactors generating carbon-free power for all. Centrus is uniquely positioned with the only deployment-ready U.S. enrichment technology that is suitable for national security missions. Under longstanding 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 that 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 United States Department of Energy has said that a new domestic enrichment capability eventually will be 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. And now for more details on the quarterly financial results, I will turn the call over to Philip.

Thank you, Dan, and good morning, everyone. As Dan mentioned, for the third quarter 2020, we had total revenue of 33.6 million. Revenue from the LEU segment declined 69.1 million for the third quarter compared to the same quarter last year. This decline was because we had no SWU deliveries in the quarter, but we did have some uranium sales. The variability from quarter-to-quarter rises because our customers in the LEU segment generally have multiyear contracts with purchase obligations that are annual, not quarterly. So the customer decides what month to take their annual purchase commitment. 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 when prices were higher than they are today, and others were signed when prices are lower. So a quarter can look better or worse depending upon the price points of particular contracts that we're delivering on during that quarter. We anticipate that the revenue in the fourth quarter of this year for the LEU segment will be the highest of any quarter for 2020, assuming there are no interruptions to our planned customer deliveries based on changes in the market or COVID-19. Cost of sales for the LEU segment decreased 34.8 million in the third quarter 2020 compared to the same period in 2019, again due to no deliveries being made in that quarter. Our technical solutions segment revenue and cost of sales decreased by $2 million and was flat, respectively, compared to the same quarter in 2019. This reflects the mix of technical solutions work performed in each of the periods, including work performed under the HALEU contract that Dan talked about before. Now I'd like to talk about our SG&A costs. This quarter, our total SG&A decreased by 2 million compared to the same quarter last year as we reduced our consulting cost by about 1.3 million and our compensation expense by 800,000. We continue to look at opportunities to reduce SG&A as we have over the last several years. As far as cash, we ended the third quarter of 2020 with a strong consolidated cash balance of $152.8 million. Again, as stated before, operating results and cash flows vary from quarter-to-quarter. Now I'm going to turn the call back over to Dan.

Thank you, Philip. Before we close, I would like to add just a few thoughts on the future of advanced nuclear reactors. As I mentioned earlier, the U.S. Department of Energy recently announced the two major demonstration awards for the Advanced Reactor Demonstration Program, which will fund the deployment of two first of a kind advanced reactors in the next five to seven years, laying the groundwork for the potential commercialization of those reactor designs. This program reflects the strong commitment of the U.S. Department of Energy and a bipartisan coalition in Congress 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, including both winners of the ARDP demonstration awards, and Centrus is proud to be on the vanguard of that effort. In addition, there are now two separate efforts underway at the U.S. Department of Defense to explore the potential of micro-reactors to support our national security requirements at home and abroad. One of those efforts known as Project Pele aims to field the prototype HALEU-fueled micro-reactor within three years. There is also an effort underway led by the Air Force to explore using micro-reactors, which are reactors of like 1 to 10 megawatts instead of a larger size to provide an assured source of power to military bases. If either or both of these efforts go forward, the requirement for domestically-produced HALEU could be significant and we will be ready to meet that need. 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. And with that, operator, we would be happy to entertain any questions.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Rob Brown with Lake Street Capital Markets. Please proceed with your question.

Good morning, Dan. Good morning, Philip.

Good morning, Rob.

Good morning.

First question is on the advanced reactor projects that you mentioned. Could you just give us a sense of how much – I think you said how much HALEU capacity you'd have as those ramp and how you'd sort of envision those coming online and then you having fueling capacity to supply them, maybe a sense of how that kind of plays out?

Sure. Yes, certainly. So the reactor designs and they're all proprietary, of course, Rob, vary a lot. And some of them require quite modest amounts of HALEU and some of them require quite substantial amounts. If we went beyond the demonstration cascade to building, say, a full cascade of 120 machines, that would give us about 5 or 6 metric tons per year of HALEU. And if we just had just the 16 machines, it's about 900 kg or nearly 1 MTU per year. And how far that would go? Again, just depends on the particular designs. We could – with even the demonstration cascade, we could supply two or three of the smaller versions. But for the larger versions, we would want to build that additional capacity. The good news about the way the thing is set up, Rob, is that it's faster to build an enrichment cascade than it is to build a reactor. So we're going to have plenty of runway to see if we get the fidelity and the demand signal, and it turns out that some of the larger reactors that need more HALEU are going to be built. We have plenty of time to build the machines and time to satisfy whatever demand develops. Again, one of the nice things about our current business model compared to the – for those who were paying attention years ago to the American Centrifuge project, which was anticipating a massive 3 million SWU facility in one move. Now we're looking not at a massive plant with all the feed and withdrawal consolidated and so forth, but one in which we can meter in the investment and meter the production of our machines to match the demand signal as it emerges.

Thank you. [Operator Instructions]. Our next question comes from the line of Richard Howard [ph] with Boiling Point Resources.

Good morning. Heading back to the base businesses that exist now, Dan, do you have a feeling that the underfeeding of centrifuges worldwide is gradually ending with the current price situation or do you think that is continuing?

Good to hear you, Rich. Thanks for the question. So among the things that people hold close in this industry is exactly how much underfeeding they're doing, but the way – I think the way to think about it is that gradually, and it is a gradual process, the overhang of excess capacity in the market is gradually easing. And therefore – basically for those who don't follow it closely, underfeeding is what happens when there's a lot more supply of enrichment capability than there is demand for separative work. And so since people like to keep those machines running for economic efficiency and operational reasons, they turn from enriching fresh uranium to basically re-enriching tails and creating effectively a new uranium mine. And so when the depleted tails are then restored to 0.7% concentration of U-235, they've effectively created a bunch more natural uranium, which has a weighting effect and depresses the market. So I don't know because, again, the producers – we are not operating, as you would know, Rich, now. So we aren't doing that now in the operational sense. And we don't have confidential information on what our competitors are doing. But the natural tendency would be for that underfeeding to ease over time, but I think it's quite a gradual process. And my hunch it will be some period of time before that's worked through.

Thank you. [Operator Instructions]. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Leistikow for any final comments.

Thank you, operator. This will conclude Centrus' third quarter 2020 investor call. I want to thank all of our listeners online and those who called in. We look forward to speaking with you again next quarter.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.