Centrus Energy Corp. (LEU) Q4 2021 Earnings Report, Transcript and Summary

00:02 Greetings and welcome to Centrus Energy’s Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. 00:24 I would now like to turn the call over to Dan Leistikow, Vice President, Corporate Communications. Thank you. You may begin.

00:33 Good morning. Thank you all for joining us. Today’s call will cover the results for the fourth quarter and full-year of 2021 ended December 31. Today we have Dan Poneman, President and Chief Executive Officer; Philip Strawbridge, Senior Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer; and Kevin Harrill, Controller and Chief Accounting Officer. 00:53 Before turning the call over to Dan Poneman, I 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 afternoon. We expect to file our report for the year ending December 31, 2021 and the fourth quarter of 2021 on Form 10-K later today. 01:15 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. 01:26 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. 01:41 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. 01:55 Finally, the forward-looking information provided today is time-sensitive and accurate only as of today, March 11, 2022, 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. 02:16 Thank you for your participation. And I’ll now turn the call over to Dan Poneman.

02:22 Thank you, Dan. And thank you to everyone on the call today. I am pleased to report that Centrus Energy had a robust fourth quarter, which helped contribute to a record year in 2021 with annual revenue growth of 21% and $175 million in net income. 02:40 Our financial condition is stronger now than it has been in years. Even as we reduced our pension debt by more than $100 million and spent more than $40 million to retire the preferred shares, we still managed to increase our cash balance to $193.8 million at year-end. 03:00 In 2021, we completed a series of transactions totaling $43.3 million to repurchase and retire all remaining Series B Senior Preferred Shares at a discount. Wiping out the preferred shares, which were accruing deferred dividends, much like a debt instrument, represents a critical milestone in strengthening our balance sheet. 03:23 Furthermore, we reduced our net pension liabilities by more than $100 million since the beginning of 2021. As of December 31, 2021 the long-term net liability was down to $23.1 million. As our funded status has improved, we have been taking responsible steps with our pension manager to shift to a more conservative asset allocation to reduce our exposure to market volatility and to help protect the gains we have made. 03:52 A key piece of our success story is our LEU segment, where we saw a 64% increase in our sales volume for uranium enrichment. That increase reflects the volume of deliveries we made in 2021, compared to the previous year. But we've also had a great dealer success in making new long-term sales that will bring us revenue streams in the years to come. 04:16 Even after all the deliveries we made in 2021 that came out of your order book, we increased the overall value of the order book year-over-year standing at $986 million as of December 31. 04:30 As we look to the future, we are making great progress in our drive to pioneer the market for High-Assay, Low-Enriched Uranium or HALEU, the next generation nuclear fuel that will be needed for the majority of the advanced reactor designs that are currently under development, and may also be used in the existing fleet of reactors. 04:52 Under our existing contract with the U.S. Department of Energy we have been building a cascade of centrifuges near [indiscernible] Ohio to demonstrate HALEU production with the U.S. Technology we've developed. 05:05 Manufacturing and assembly of the centrifuges is now done. All of the support systems are in place and in June, we secured approval from the U.S. Nuclear Regulatory Commission for our license amendment request, making the Piketon plant the first and only U.S. Facility that is licensed to produce HALEU with an enrichment level of up to 20% uranium 235. 05:29 As we have previously reported, while Centrus has been able to keep our own work on track throughout the pandemic, the pandemic has affected the supply chain as has been the case for many companies. The Department of Energy has also experienced COVID-related delays in obtaining the HALEU storage cylinders that the department was obligated to provide as part of the demonstration. 05:52 The demonstration cannot begin without the storage cylinders and it wasn't going to be possible to complete the operational portion of the demonstration before the June 1, 2022 expiration of the current contract. In addition, the administration has now indicated that it wants to help support a longer period of demonstration in operations than would have impossible under the original contract. 06:16 As a result, and as we noted in an SEC filing last year, the department changed the scope of the existing contract and indicated that the operational portion of the demonstration would be handled as part of a separate competitively awarded contract. More recently on February 7, the department published a pre-solicitation notice to clarify the path forward. 06:39 They outlined a two-face process. The first phase, which the department indicated would take up to two years would consist of finishing the cascade and demonstrating operations for at least a full-year after that. The second phase would consist of up to three-year contract extensions to operate the cascade and produce HALEU. 07:04 We strongly support the department’s decision to increase the demonstration in operations period for the HALEU [cascade] [ph], which we believe will make it easier to fully commercialize the technology and to expand the plant in future. 07:18 We are committed to pioneering the market for HALEU production because we believe it will play a big role in the future of nuclear energy. One important development in the fourth quarter was that Congress passed and the President signed a bipartisan infrastructure package. 07:30 Among other things, the bill provides nearly $2.5 billion in appropriation over four years to the U.S. Department of Energy's Advanced Reactor Demonstration Program to support construction of the first two commercial scale advanced reactors in the United States, which the developers expect will be the first many. Both of these reactor designs require HALEU, as do many others that may be entering the market in coming years. 08:04 Finally, let me take a moment to discuss the tragedy unfolding in Ukraine. Like most of the world, we were horrified by this unwarranted unprovoked invasion and the daily toll it is inflicting on innocent civilians we are inspired by the courage and the resilience of the Ukrainian people in the face of this threat. 08:25 These events are a sobering reminder of the importance of energy security and the risks of becoming overly reliant on energy from Russia or indeed any other foreign source. We need to be clear eyed about how Centrus faces some of these risks on business, but also how we can play a role in strengthening America's energy security and national security. 08:47 As you know, while we are working to re-establish a domestic enrichment capability for Centrus and for the United States, the majority of the company's revenues come from sales of your uranium enrichment we purchased from other suppliers. 100% of the world's uranium enrichment is produced by foreign state-owned corporations. 09:07 According to the World Nuclear Association, Russia has 46% of global enrichment capacity. It is by far the largest global producer, and it is our largest source of supply as well. Imports of Russian enriched uranium have for many years been subject to strict limits under the Russian suspension agreement. The package of energy related sanctions announced by the Biden administration earlier this week did not include sanctions on nuclear fuel. We are watching this situation very closely. 09:35 We have worked in recent years to diversify our base of supply and have developed measures to mitigate the near term impact of any disruption. However, longer-term disruption would significantly impact the entire nuclear industry, including Centrus. If you reiterate something I have said in the past, only a robust public sector and private sector investment in a domestic enrichment capability can be a long-term solution to national security and global stability concerns. Centrus stands ready to do our part. 10:07 We have developed the only deployment ready NRC license technology that can meet America's commercial and national security requirements for HALEU and other forms of enriched uranium. We stand ready to support the U.S. Government and the U.S. Nuclear Industry in meeting these requirements in the years to come. 10:25 Now, for more details on the quarterly financial results, I’ll turn the call over to Phil.

10:32 Thank you, Dan. Good morning everyone. As Dan mentioned, 2021 was a record year for Centrus with a particularly strong fourth quarter. Our annual revenue increased to 298.3 million, which includes a $43.5 million settlement that we secured with the U.S. Government, during the third quarter that helped us reduce our long-term liabilities for pension and post-retirement health benefits. 10:56 Even excluding that settlement, as well as the settlement received in 2020 as per the bankruptcy – customers’ bankruptcy, we achieved revenue growth of 18% in our LEU segment and 21% in our technical solutions segment. 11:10 In our LEU segment, SWU revenue increased 8% in 2021, over 2020. Recall that SWU revenue in 2020 included a $32.6 million customer settlement of a supply contract that was subject to the customer's bankruptcy proceeding. 11:29 Excluding the one-time settlement of 32.6 in 2020, SWU revenue increased an impressive 36% in 2021 over 2020. Our cost of sales were 183 million in 2021, compared to 149.6 million in the prior year. 11:46 The biggest driver in that number was a 64% increase in our sales volume for uranium enrichment, which is dominated or denominated in SWU’s. It also reflects an increase in the amount of work that we performed under the HALEU contract and other contracts. 12:03 Overall, we achieved a gross profit of 114.5 million in 2021, a 17% increase year-over-year. Our net profit was even higher, 175 million for the year. That's in part because in addition to the strong sales and the good margins, we also achieved growth in the value of our pension assets. 12:24 We also recognized 39.1 million, primarily as a result of releasing a portion of our valuation allowance related to our deferred tax assets. Our cumulated federal net operating losses from prior years can be used to reduce future tax liability to the extent that the company generates tax, taxable income. The release evaluation allowance reflects the company's view that a portion of the federal net operating losses can be used to offset future taxable income. 12:52 For the year, we maintained our SG&A cost of $36 million with no increase over the prior year. That's a $10 million reduction from five years ago, reflecting a multi-year effort to reduce our overhead costs. 13:05 The fourth quarter was particularly strong in terms of revenue, gross profit, and net income. Recall that we focus more on annual results because our revenues and margins are very considerable from quarter-to-quarter. And as we've said before, that's driven by two factors, both of which relate to our LEU segment. 13:22 First, our customers generally have an annual purchase commitment not a quarterly commitment and due to revenue recognition rules, we recognized the revenue from a sales and whatever quarter of the customer elects to take delivery. There tends to be one quarter that has the most delivery and that's not the same quarter every year. 13:40 Second, long-term sales contracts in our order book vary widely because SWU prices have changed a lot over the years. Prices steadily decline after Fukushima, bottomed out in 2018 and have been rising ever since. We have sales contracts up and down that price curve. 13:58 A given quarter will look better or worse depending on what portion of our annual deliveries happen to fall in that quarter and whether those particular deliveries are high-priced contracts or low-priced contracts. 14:09 As Dan highlighted, we ended quarter with a cash balance of 193.8 million puts us in a strong position going forward. 14:17 With that, I'm going to turn it back over to Dan.

14:27 Thank you, Philip. Let me just take a moment to recap, because I think the numbers speak from themselves. Gross profit, up 17%; revenue, up 21%; cash balance, up 25%; SWU sales volume, up 64%; and net income, up 222%. We have a proven technology, a one of a kind NRC license for HALEU production, an order book of almost $1 billion. 14:58 Plenty of opportunities to win new sales in a rising market and an exceptionally talented workforce and dedicated workforce ready to take on the future. I am proud of what our team has accomplished so far, but firmly believe that the best is yet to come. 15:14 And with that, operator, we would be happy to entertain questions.

15:19 Thank you. [Operator Instructions] Our first question comes from the line of Rob Brown with Lake Street Capital. Please proceed with your questions.

16:01 Hi, good morning.

16:02 Good morning, Rob.

16:03 I have questions on the new – the contract change with the DOE on the HALEU project, how is that different, I guess ultimately, if they're running over three years or a longer period of time in terms of the contract size compared to what you have or what's the kind of difference if you know it at this point?

16:24 Well, the principal difference, Rob is because of the events that I mentioned in my opening remarks. Three-year contract is over on the calendar June 2022. And because cylinders were not there, what we had initially anticipated doing in the original contract as drafted, as executed what to finish up the standing up of these demonstration machines and then actually running them for a little while to produce some actual 19.75% product. And you can't do that if you don't have these cylinders to take the gas that comes off the [indiscernible] and so they've just, sort of timed out so to speak. 17:15 And therefore, that aspect was taken out of the scope of this contract and put into the scope of a new contract that they intend to negotiate and have put out this notice that they are going to accept proposals to do. So that's one key difference that the actual – that last step that we would have been ready to do, we simply couldn't do it because during these COVID supply chain challenges prevented them from producing the cylinders that we were going to put that gas into, but the other thing is, as I also indicated in my opening remarks, now they're talking about sustaining that, we were only going to do that for just a little while. 18:03 And now they're talking about doing it for potentially much longer under their pre-solicitation notice which you have seen, I'm sure. And that's a good thing because it's always two things. Number one, it's always used to keep running, you use machines once they're up and running. It's – you might as well sort of get the benefit out of it and that leads to the second point, which is – actually could produce a meaningful amount of highly enriched, I'm sorry, High-Assay, Low-Enriched Uranium over a longer period of time. 18:31 And there are of course much larger requirements that we hope will be supported by building out further on a much larger program that we also expect to see coming our way, but those are two reasons why actually moving to the second contract could be a very useful thing.

18:55 Great. Thank you. And then a follow-up just on the – on kind of the Russian exposure and the supply for TENEX, I know it's a meaningful produce, but how is that, sort of, you know how do you mitigate that risk in the near-term and what are your sort of thoughts on some of the risk mitigation that you can do?

19:16 Well, even before this crisis, it's inherent in our business that we are always looking to diversify our sources, the supply from reading our SEC filings, of course, we have major supply arrangements with Orano, the French enricher. We have other arrangements besides and we are continually refreshing and updating that, obviously more recently with the events in Ukraine, we have doubled down on those efforts and continued to look at ways to move things around and we have people who are very good at, it’s a very diversified market with lots of pockets of different parts of the fuel components and so forth. And we're just continuing to do that as much as we can. 20:08 The other thing of course, we have done is, as you've seen over many quarters to continue to strengthen the balance sheet, including building up good cushion of cash. So, if there are disruptions that are requiring more cash or whatever to achieve the kind of diversification and mitigation that we need to, we have some of that as well. 20:33 So, we're just in a continual mode of continuing to diversify and find alternatives, but obviously the longer a disruption would go on, the more challenging that would become because, as, again, I'm sure you know, Russia accounts, and I said this in my opening remarks, 46% of world capacity and it's not like oil where you can just start pumping, it's not like a genie that you have a massive amount of enrichment pop-out onto the market when you rub a bottle or clap your hands. 21:08 So, it's a challenge not only for Centrus, it's a challenge for U.S utilities, it's a challenge for the whole industry. If 46%, it’s just common sense of world enrichment capacity is removed from the global market, there's just not enough enrichment left to power the existing fleet of world reactors worldwide. So, it's – we are a small part of a very large puzzle.

21:36 Great. Thank you for all the info. Turn it over.

21:39 Yeah.

21:42 Thank you. Our next questions come from the line of Joseph Reagor with ROTH Capital. Please proceed with your questions.

21:49 Hey, Dan and team. Thanks for taking the questions.

21:53Hey, Joe.

21:54 Okay. So, kind of following on the last question, I know you guys don't talk in specific numbers for legal reasons and other reasons, but if we think about this hypothetically, if Russia, let's say represents x amount of uranium supply this year, the efforts you've taken, what percent of that, whatever that x number is, do you think you could mitigate like over let's call it a six-month period?

22:27 Yes. Joe, I'm pretty sure that that gets to a little detail that and I’ll defer to Philip. I don't think we can get into that kind of detail on this call, but perhaps, Philip has any other insight.

22:44 Yes, I'll just say this. As Dan said in his comments and we said before, we do have a diversified supply capability that's not to say that there won't be an impact, but we think that we have the capability in the near-term. It all depends on how long it is Joe.

23:03 Okay. And then, maybe a different question. Obviously, the utilities are aware of this issue as well. Have you guys seen any indication that the utilities are interested in taking higher percentage than the expectation for the year divided by four early this year because there – because they're trying to build a domestic stockpile? I know you can't give specifics, but have you seen anything that indicates that?

23:37 Well, I would just say this. We have always remained and we are today in regular communication with our customers, about their needs and timing deliveries. There sometimes are discussions about moving things around, not only in this crisis frankly, but in other situations as well. Right now, there's a particular focus on it, but we're working with them to meet their needs, but I'm not in a position here to today to, sort of get very precise about quantities or timelines, etcetera.

24:11 Okay. I'll hop back in the queue.

24:17 Thank you. There are no further questions at this time. I would like to turn the call back over to Dan Leistikow for any closing comments.

24:27 Thank you, operator. This will conclude our investor call for the fourth quarter of 2021. As always, I want to thank our listeners online and our investors who called in. And we look forward to speaking with you again in the future.

24:41 Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Have a great weekend.