Centrus Energy Corp. (LEU) Q4 2020 Earnings Report, Transcript and Summary

Greetings. Welcome to Centrus Energy Fourth Quarter Year-End 2020 Earnings Call. [Operator Instructions] Please note this conference is being recorded. At this time, I'll turn the call over to Dan Leistikow, Vice President, Corporate Communications. Mr. Leistikow, you may now begin.

Good morning, and thank you for joining us. Today's call will cover the results for Q4 and year-end 2020 ended December 31. Here today for the call are Dan Poneman, President and Chief Executive Officer; Philip Strawbridge, Senior Vice President and 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 annual report on Form 10-K 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 that 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, March 19, 2021, 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 express 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. I am pleased to report that in 2020, despite the incredible challenges brought on by the COVID-19 pandemic, Centrus Energy returned to profitability. With total revenue growing to $247.2 million, we posted a net profit of $54.4 million. Driven by the rising value of our stock, we launched a public offering that raised about $25 million before expenses. We also completed a cash tender offer to retire approximately 60 million shares of Series B senior preferred stock, and did so at a 25% discount, creating more value for our Class A shareholders. These efforts have strengthened our balance sheet and benefited our shareholders, as reflected in recent stock performance. There are a number of factors driving the success, but none of it could have been possible without the hard work and incredible talent of our employees. I'm so proud of each and every one of them and all that we have accomplished together. At this time a year ago, the country had just entered lockdown. We could not have known at the time that extensive teleworking, masking and social distancing would be a part of our lives for so long, but everyone in the company has risen to the challenge. We have not only endured, we've gotten stronger. And I am convinced that the best is yet to come. We are, of course, quite fortunate that the COVID-19 pandemic does not affect our revenue in the way that it does for many direct-to-consumer [indiscernible]. Nearly all of our revenue comes from stable long-term contracts with utilities and the U.S. government. The pandemic hasn't taken away our ability to make deliveries to our customers, and we expect to continue making those deliveries without interruption. But because the health and welfare of our employees and their families is our paramount concern, the pandemic has forced us to change the way we do our work. We have shifted as many employees as possible to telework, and taken aggressive steps to protect those who must continue their classified and technical work at our facilities in Tennessee and Ohio, building what will be a first-of-a-kind advanced nuclear facility. Under the 3-year $115 million contract Centrus was awarded by the U.S. Department of Energy in 2019, we are deploying a cascade of our AC-100M centrifuges to demonstrate production of a next-generation nuclear fuel called High Assay Low Enriched Uranium or HALEU. Construction is well underway. And the Nuclear Regulatory Commission is conducting a technical review of our license amendment request. Upon NRC license amendment approval and successful completion of the NRC's Operational Readiness Review, Centrus will have the nation's first NRC-licensed HALEU production facility, and expects to begin production by early 2022. As our regular listeners and investors already know, the low enriched uranium, or LEU, that is used in the existing fleet of reactors, is enriched so that the concentration of the fissile isotope uranium 235 is 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. Most of the next-generation reactor designs that are now under development are expected to operate on HALEU. In fact, of the 10 reactor designs that the Department of Energy selected for its multibillion-dollar advanced reactor demonstration program, 9 are designed to operate on HALEU. The Department of Defense also had a program underway called Project Pele to build a prototype of a mobile military microreactor within the next 3 years. When they solicited applications for the program, one of the key requirements was that the reactor must operate on HALEU. The same advantages that HALEU can bring to next-generation reactors also make it attractive to our current fleet of nuclear reactors. There are a number of next-generation fuel designs in development that would require higher enrichment levels than today's fuels. This would allow the reactors to reduce the number of refueling outages and sell more power to the grid. While our initial production capacity next year will be modest, we can expand the facility in modular fashion. Subject to the availability of funding and/or offtake contracts, Centrus can deploy additional centrifuges in our facility to meet whatever level of production is required for commercial and/or U.S. government purposes. Spot prices for enrichment, measured in dollars per separative work unit, or SWU, have increased by almost 60% since reaching their lowest point in August 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. In fact, from November through the end of January, our sales team had one of its most productive periods in recent years, securing new contracts and sales commitments valued over $100 million. That includes long-term sales through 2027. These new sales and others we made throughout 2020 have enabled Centrus to maintain the value of our long-term order book at approximately $960 million, even as some of our oldest and highest-priced contracts have rolled off. The other major development in our LEU segment last year was the resolution of the Russian Suspension Agreement, which is a trade agreement between the United States and Russia that places limits on the amount of Russian nuclear fuel that can be imported. As you may recall, the negotiations between the U.S. Department of Commerce and the Russian Federation over extending that trade agreement had cast considerable uncertainty over our largest supply contract because it was not clear how new import limits, starting in 2021, might affect our ability to execute on our existing supply contract and make deliveries to our U.S. utility customers. The agreement reached in October and codified in legislation sets aside a portion of the annual import quota to be used for Centrus supply contract, which runs through 2028. The amounts set aside are sufficient for us to meet our strategic plan objectives and deliver on our sales commitments in the U.S. market. This has removed a significant source of uncertainty for us and gives us access to reliable, affordable supplies for many years as we work to reestablish our own domestic production. And now for more details on the year-end 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 year-end 2020, we had total revenue of $247.2 million and achieved net profit of $54.4 million. On an EPS, on an adjusted basis, that equates to about $4.71 diluted per share for the year. In the fourth quarter, we achieved on an adjusted basis $1.46 per share, again, on a diluted basis. Revenue for the LEU segment increased about $21.1 million in 2020 compared to 2019. Our SWU revenue for 2020 includes $32.6 million collected in settlement of the supply contract that was subject to the customer's bankruptcy proceeding, as we've talked about before. Excluding these proceeds, the average SWU price billed to customers increased 13%. As we 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, so they can decide in which month they want to take their purchase commitments. And that's the quarter when we record the revenue. Some quarters look worse because we have fewer deliveries, while others look better because we have more deliveries. The third quarter of 2020, as you'll recall, was a good illustration. We didn't have any deliveries during those 3 months. But when we announced our third quarter results, we also said that we anticipated fourth quarter revenues for the LEU segment would be the highest of any quarter for 2020. And that's exactly what happened. We had $77.7 million in LEU revenue in the fourth quarter, significantly higher than any other quarter. That was more than 40% of our LEU revenue for the year. We continue to benefit from the price reset provision in our largest supply contract, which runs through 2028. Because our cost of sales are calculated based on a long-term rolling average, it took some time for those lower costs to be fully reflected in our financials. But you can see now what a difference it's making. Even though our revenue in the LEU segment was $21.1 million higher in 2020 than 2019, our cost of sales for that segment was $25.9 million lower. Our Technical Solutions segment revenue increased by $16.4 million in 2020 as compared to 2019, as we ramped up construction activities under the HALEU contract. Cost of sales for this segment decreased by $1.7 million compared to 2019, reflecting the mix of Technical Solutions work performed in each of the periods. Now I want to talk about our SG&A cost. In 2020, our total SG&A increased by $2.3 million compared to last year. Overall, our SG&A cost for 2020 versus 2019 would have been lower except for the incentive compensation expense increased $2.9 million, primarily related to remeasurement of our obligations under the long-term incentive plans, which are based on our stock price, which has increased over 500% in the past 2 years. Consulting costs related to capital financing evaluation, claims recoveries, international trade, et cetera, increased $1.5 million in 2020 compared to 2019. And other consulting costs decreased $1.2 million. Salary and benefit costs decreased $600,000. Travel expenses decreased by $0.5 million, and other SG&A expenses increased by a net of about $200,000. 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, even after purchasing and retiring approximately $60 million in Series B preferred stock that Dan talked about, and again, which represented a little over 62,000 shares, we ended 2020 with a higher consolidated cash balance of $152 million. As Dan mentioned, in 2020, we focused on strengthening our balance sheet by raising $25 million in the third quarter, and as previously mentioned, eliminating 60% of the preferred shares at a 25% discount in the fourth quarter of 2020. We're pleased that our shareholders have been the beneficiaries of these actions. We'll continue to look at opportunities to strengthen our balance sheet. Now I'm going to turn the call back over to Dan.

Thank you, Philip. Let me offer a final thought about the future of the nuclear industry and the important role we can play in it. As the United States and other countries confront the growing need for reliable carbon-free electricity, as we work to reduce emissions and combat climate change in the coming years, it is increasingly clear that nuclear energy must be part of the solution. In recent years, we've seen bipartisan action around the country to preserve existing reactors and bipartisan action at the federal level to deploy the next generation of advanced reactors. Most recently, in December, the Energy Act of 2020 was adopted as part of the Omnibus Appropriations Bill. Among other things, the new law is designed to promote deployment of advanced nuclear reactors, and specifically requires the Department of Energy to create a new program to make HALEU available by 2026 for civilian, domestic research, development, demonstration and [indiscernible]. Centrus plans to be the first to come to market with HALEU. In addition to meeting the emerging commercial requirement for HALEU, we are also uniquely suited to meet the government's own requirements for HALEU and other forms of enriched uranium. The Department of Energy's National Nuclear Security Administration, for example, needs a supply of low-enriched uranium for the production of tritium, which is necessary to maintain our existing nuclear deterrent. They may also need HALEU, potentially in significant quantities, if the Department of Defense decides to move forward with microreactor deployments. Binding nonproliferation agreements and long-standing U.S. policy prohibit the use of foreign enrichment technology for defense purposes, which is why the Department of Energy has said that a domestic technology enrichment capability will ultimately be required to meet these national security needs. Our AC-100M centrifuge is the only deployment-ready technology capable of meeting these needs. We stand ready to support the department in whatever way we can. Centrus' ability to meet both civilian and defense requirements is part of what makes us unique as a company. All of us at Centrus are strongly committed to support U.S. national security and to provide clean and affordable energy to all. Many of us have been proud to work for Centrus or its predecessor organizations for decades, and in some cases, for generations. To those of you who have invested in Centrus and believe in us, know how much we appreciate the trust and confidence you have put in us. We look forward to continuing to build value for you, for the U.S. nuclear industry and for the country. Operator, we would 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.

First question is on the SWU pricing environment. How that's been trending lately? And have you seen that change since the beginning of the year? And sort of what's your sort of view on how that's playing out here?

So ever since, Rob, the market bottomed in August of 2018, we have seen a rising curve for SWU price, both spot and term prices. And those trends have continued. We have seen, as I think I indicated in my remarks, increased activity. As the uncertainty of the Russian Suspension Agreement and the lack of resolution behind that has gone away, a lot of the demand that had been basically withheld as people were not sure what was the import environment, that demand has now come to market. And that demand, in turn, has put some upward pressure on both term and spot prices. So we continue to observe those kinds of those trends. And we expect that general rising of prices to continue.

[Operator Instructions] Our next question is from Joseph Reagor with ROTH Capital Partners.

And congrats on a great finish to the year. So I know you guys don't give specific guidance, but could you give us any color on expectations this year versus 2020 and anything you can as far as the quarterly expectations? We're almost done with the first quarter already. So any color there would be great.

Yes, Joe, I'll take that. I mean, if you look -- we did give some guidance, as you'll recall. We said that 20 -- 2021 and 2022, from a revenue perspective, we expect to be slightly higher than 2020, if you exclude that bankruptcy settlement. And we say that margins will be about the same, right? So again, what we anticipate on a quarterly basis is mixed, if you know what I mean. We don't give that guidance. So I'm kind of reluctant to say anything. But we do believe that where we're at right now, it will be probably a little more balanced than in previous years. But again, we don't give quarter-by-quarter guidance. So did that help?

Our next question comes from the line of Richard Fels with Odeon Capital.

My question is a 2-part question. One, can you give us any view on Centrus' part in reestablishing production domestically? What would that look like in the next 3 to 5 years on a national scale? And does Centrus play a part in that? Or could you see Centrus playing a part in that?

Yes. Do you want to say the other part of your question?

The other part is, depending on how you answer the question, do you think that you would use the favorable capital markets to raise additional capital to possibly control, produce, position yourself to be a beneficiary of the reestablishment of U.S. production facilities that is mandated by the government?

Yes. Those are great questions. So thank you. So the short answer -- and thank you for the question. To the first question is yes. Centrus does view itself as an essential part of reestablishing the production of enriched uranium. The United States stopped enriching uranium in 2013. And this is the first time since 1945, this period, in which we have not had domestic-sourced, domestic technology uranium enrichment. And we have been focused like a laser on reversing that. And that's why we've been very grateful to the U.S. Department of Energy for entering into the cost share contract that I mentioned in my remarks. And notwithstanding COVID, which has been a tremendous challenge for all of us, but when one is dealing with building nuclear machines in an environment in which people can't telework all at the time, we've been very grateful that we've been able to manage the things so that we're actually on track, and we are working very well with the Nuclear Regulatory Commission. And by early next year, we will actually be starting production of this exciting new fuel form, this 19.75% High Assay Low Enriched Uranium with a Nuclear Regulatory Commission to cover that. So that does put us in a position. It's a modest cascade that we'll be beginning with just 16 machines in the first instance, but it is very much our ambition to build on that initial cascade a larger production capability. There was a survey performed by the Nuclear Industry Council of members of the advanced reactor community. And they were asked in the survey, what is the problem that keeps you up at night? And the number 1 answer was access to this special fuel form, this HALEU. And so we want to meet that demand. There's a variety of curves out there that talk about what the demand curve in this new fuel form will look like. But the good thing about our technology is it's modular. So we can meter out the deployment of additional centrifuges to not -- to neither underbuild or overbuild, but to meet that demand. And since you can build enrichment facilities faster than you can build reactors, that sort of relative time scale favors us in terms of measuring and planning. So we hope and expect to play a pivotal role in performing that function. It's also important to note that there are national security requirements that are also anticipated, apart from this Advanced Generation Community, for enriched uranium. And we are uniquely suited to be able to do that because, as I said in my remarks, we have the only U.S. origin technology that is deployable to meet those requirements. And there's a long, long history going all the way back to President Eisenhower who had to work over of the federal government and the commercial sector working in tandem so that the national security requirements in the nuclear energy sphere can actually be used to leverage and enhance the commercial prospects. That's exactly how the U.S. commercial industry was launched in Shipment Port, Pennsylvania back in 1957. So that's on your first question. On the second question, about the use of favorable capital markets. It was really gratifying to us, in this past year, 5 years after emerging from Chapter 11, we were finally able to do a public offering. We've raised equities. We have brought in 80% of our preferred and -- $80 million, that is. And we intend to continue to be focused on capital markets. And as we find opportunities to make good use of the cash that we've raised, that's something that's always on our menu of ways to do that. And it could benefit the company in a number of ways. The capital raises we've done before have, I think, as Philip indicated, facilitated our strengthening of our balance sheet through the preferred offer that we did to bring in our preferred shares this past year. But there are also other investment opportunities that might appear that would help us in our quest to return to production. And to the extent that the best use of capital that we might raise in capital markets would be dedicated to that, that's another option. We always look at the highest and best use of whatever cash we raise. And we always do keep an eye on the overall tenor of capital market, whether the moment is propitious for us to act.

[Operator Instructions] The next question is a follow-up from Joseph Reagor with ROTH Capital.

Just one more thing, kind of following on a little bit of the answer you just gave. With the improved balance sheet, is there an opportunity in the near term to look at either more preferred repurchases or some debt repayment or maybe a debt refi? Anything like that?

Thanks for the question. And the answer is, we are always looking for those kinds of opportunities. And we have -- now that we've filed the K, we've been focused in the last few days, obviously, on doing that and closing our books and so forth. But we're always on the lookout for those kinds of opportunities. I can't tell you exactly today what we will or will not do, obviously. But it's something that we continuously monitor effectively on a daily basis when we will have opportunities to do that. And the bottom line is, for us, it's very, very important to continue to strengthen our balance sheet. We feel very good about the progress we made, going back to our earlier tender offer where we -- we're able to cut our debt load about 3 years ago by 60%. That was the first step. And then the preferred exchange that I've already mentioned in the remarks, and Philip mentioned. So each one of these steps has put us into a better position and has been part of why it's possible for us to access capital in a way that we've had in the past. So we'll continue to keep all these options on the table and to take advantage of them opportunistically when the conditions look favorable.

And Joe, just as -- you'll note that last month, an 8-K that we filed, that we did do a little bit more preferred with one of the major holders of the preferred where we exchange for common. So yes, we'll continue to focus on that.

Our next question is from the follow-up from the line of Rob Brown with Lake Street Capital.

I just want to get your thoughts on the kind of advanced reactor market. There's been -- in the last few months, there's a number of good movements, positive movements. But how do you sort of see you fitting into that? And how -- what are sort of the cadence of development work that sort of flows from that for you?

Well, I sort of consider it like soup and sandwich, like the old commercial. That's a great question. And look, sometimes, in a very simple analogy, I talk about Henry Ford. And as he had said, I've got this great car called the Model T. I don't have gasoline. That would not have been a very good pitch, right? So we are absolutely essential to that advanced reactor community. And that's why the Congress passed legislation calling for the HALEU to be made available by 2026 and so forth. The advanced reactor community itself is very exciting right now, and in the advanced reactor development program that was managed and run by Department of Energy, which itself was a product of bipartisan legislation. Of the 10 awardees of that program, 9 of the reactor designs require HALEU. And indeed, both of the 2 largest awards, the ones that went for the actual construction of demonstration reactors, one was by -- won by TerraPower, one was won by X-energy. Both of them also require a HALEU. So we believe that we are integrally related to that growth. And in fact, you may have noticed back in September, TerraPower and ourselves, we issued a release talking about our work together. We have made it our business to basically engage with all developers. We want to be the preferred HALEU provider to that market. And you've probably seen the numbers published by Nuclear Energy Institute and elsewhere as to what those forward demand curves for the advanced reactor development community looked like. And it is our hope and expectation to be in tandem right there with the deployment of the reactors with the fuel supply to support them. And we feel very good about that, especially, because, as I mentioned, the cadence, if I can use the word cadence, is such that it's faster to build centrifuges than it is to build reactors. So we feel very good about being in a position to be able to calibrate our expansion of capacity to meet the demand that we expect to see in the advanced reactor community.

Thank you. At this time, I'll turn the floor back to Dan Leistikow for closing remarks.

Well, thank you, operator, and thanks, everyone, for joining. It was a great discussion today. This will conclude our fourth quarter 2020 investor call. And we look forward to speaking with you all again next quarter.

Thank you, all, for your time.

Thank you, everyone. This will conclude today's conference. You may now disconnect your lines at this time. Thank you for your participation.