Centrus Energy Corp

AMEX:LEU

Earnings Call Analysis

Centrus Q2: Revenue Surge and Strategic Expansion

Centrus Energy reported strong financial results for Q2 2024 with $189 million in revenue, up $90.6 million from the prior year, and net income of $30.6 million, up $17.9 million. The LEU business saw a revenue increase of $82 million due to higher sales volumes and prices. Despite higher costs, the company achieved positive cash flow and a strengthened balance sheet with $227 million in cash. Centrus' HALEU production continues to grow, supported by government funding, positioning the company for long-term growth and reduced dependency on foreign uranium.

Strong Quarterly Performance Fuels Growth

In the second quarter of 2024, Centrus Energy reported a robust revenue of $189 million, marking a remarkable increase of $90.6 million year-over-year. Likewise, net income surged to $30.6 million, up by $17.9 million from the previous year. The primary driver of this financial success was a significant volume in customer deliveries within the Low-Enriched Uranium (LEU) segment, generating $169.6 million in revenues and $33 million in gross profit, reflecting an $82 million increase from last year. This solid performance underscores the company's ability to capitalize on rising demand in the uranium enrichment market, notably for HALEU, which is critical for next-generation reactors.

Strategic Expansion and Government Support

Looking ahead, Centrus is focusing on expanding its production capacity for HALEU and conventional LEU. With a strategic investment plan, the company aims to enhance its manufacturing capabilities at its Ohio facility, which currently has the capacity to support over 10,000 centrifuges. Significantly, Centrus has secured $900 million in LEU purchase commitments from commercial customers, contingent upon financing for expanded capacity. Additionally, the Department of Energy (DOE) is backing this initiative with over $3.4 billion in funding, representing the largest investment in domestic nuclear fuel production in decades.

Addressing Market Volatility and Competitive Landscape

Centrus faces a challenging competitive landscape dominated by state-owned enterprises but boasts a unique position as the only American-owned enrichment company utilizing U.S. technology. The company highlighted that while it is experiencing fluctuations in revenue due to contract timing, there are no immediate signals indicating a drop-off in demand. With a 30% increase in Standard Work Units (SWU) delivered, the operational efficiency remains strong, emphasizing the cyclical nature of the business aligned with utility needs.

Navigating Legislative Changes and Import Waivers

With the impending ban on enriched uranium imports from Russia effective August 11, 2024, Centrus has proactively secured waivers covering importation for U.S. customers through 2025. These waivers are crucial as they mitigate the risks associated with transitioning back to domestic production. The reliance on Russian-origin enrichment accounted for over 25% of U.S. needs last year, making these waivers essential for maintaining a steady fuel supply during the capacity ramp-up period.

Balance Sheet Strengthening Initiatives

In parallel to its operational advancements, Centrus has made significant strides in strengthening its balance sheet. The termination of the majority of its pension obligations through a group annuity contract has resulted in a $420 million reduction in its obligations, covering approximately 2,400 beneficiaries. As of the end of the quarter, the company reported a cash balance of $227 million and a total cash and restricted cash position of approximately $259.6 million. This financial fortitude is pivotal as Centrus prepares for its next phases of growth and expansion.

Future Outlook and Strategic Goals

The leadership at Centrus remains optimistic about the future landscape of the nuclear fuel market. With consistent bipartisan support in Congress for restoring American leadership in nuclear energy, the company anticipates continued momentum for domestic uranium enrichment capabilities. The upcoming proposals for HALEU and LEU funding further support this outlook, with key initiatives expected to be implemented despite the uncertainties in the political landscape. Looking forward, the commitment from leadership to deliver strong financial results reflects a confident trajectory for Centrus amid a shifting energy landscape.

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. My name is John, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Centrus Energy Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Dan Leistikow. Please go ahead.

[Dan Leistikow, executive]

Good morning. Thank you all for joining us. Today's call will cover the results for the second quarter 2024 ended June 30. Today, we have Amir Vexler, President and Chief Executive Officer; and Kevin Harrill, our Chief Financial Officer.

Before turning the call over to Amir Vexler, 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 afternoon. We expect to file our report for the second quarter 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 information we may discuss on this call today can 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 would 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, August 7, 2024, 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'll now turn the call over to Amir Vexler.

[Amir Vexler, executive]

Thank you, Dan, and thank you to everyone on the call today. I am pleased to report another strong and productive quarter for Centrus in which we delivered strong revenue, achieved positive profit margins, strengthened our balance sheet and positioned ourselves for long-term growth. As always, we remind listeners that our results vary substantially from quarter to quarter due to the timing of customer deliveries, which is why we encourage folks to focus on the annual numbers as opposed to any one quarter.

We had $189 million in revenue and reported $30.6 million in net income for the quarter, driven by a large number of customer deliveries in our LEU business segment. We expanded our cash balance to $227 million while strengthening and derisking our balance sheet by eliminating the majority of our remaining pension obligations. Kevin will discuss this in greater depth shortly.

Last October, we made history by becoming the first U.S. uranium enrichment company to commence plant operations using U.S. enrichment technology in 7 years. We are continuing to produce high-assay, low-enriched uranium, or HALEU, which is urgently needed to fuel the next-generation reactors. The modest quantity of HALEU we can produce today is the foundation for the Department of Energy in supporting demonstration reactors and new fuel designs. Our potential is exponentially larger. The current HALEU production cascade occupies a small corner of our Ohio facility, which is designed to accommodate more than 10,000 centrifuges. Our goal is clear: to expand our capacity at our American centrifuge plant in Ohio so that we can meet the full range of commercial and national security requirements for enriched uranium, including not only HALEU but also low-enriched uranium for the existing fleet of commercial reactors.

The global uranium enrichment market is dominated by state-owned enterprises, which is why U.S. government support for domestic enrichment technology through public-private partnership is so critical. Government investment is especially justified here given the fact that the government has its own requirements for enriched uranium, including national security missions that exclusively require the use of U.S.-origin enrichment technology, a technology only we can provide today.

While the build-out of a scaled enrichment facility will require new investment, as well as the support of the U.S. government, in the past few months alone, we have seen strong signals that give us confidence in our strategic plans. Last quarter, we announced $900 million in LEU purchase commitments from commercial customers contingent on our ability to secure financing necessary to build the new enrichment capacity.

In addition, the Department of Energy has issued RFPs designed to jump-start American production of both LEU and HALEU. We submitted our proposals for HALEU earlier this year, and we are now developing our proposals for the LEU RFP, which is due next month. These RFPs are backed by more than $3.4 billion in congressional appropriations that were approved as part of the Inflation Reduction Act in 2022 and the bipartisan government funding bill in March 2024. Taken together, they represent the largest federal investment in domestic nuclear fuel production in decades.

These are competitive solicitations. There are no guarantees. I have told my team to take nothing for granted. Our job is to put together competitive proposals that highlight our capabilities to bring the best value for the government.

We have a strong case to make. We have a proven technology that is already in operations. We have 1 of only 2 U.S. sites currently licensed for LEU production and the only one license for HALEU production.

We are the only American-owned enrichment company. We are the only technology that will fully rely on and utilize an American supply chain. We manufacture our centrifuges in the U.S. Our technology is U.S.-origin. That is crucially important because, under long-standing nonproliferation agreements, only a U.S.-origin technology can be used to support national security missions.

In short, we are uniquely positioned to deliver an all-in-one, made-in-America solution, restoring a truly domestic uranium enrichment capability which will strengthen our energy security and our national security while creating family-supporting, high-tech jobs for American workers. If we are successful, we will play a pivotal role in enabling the United States to transition away from depending on foreign supplies of enrichment.

And there's no time to waste. In May 2024, the President signed into law the ban on the imports of enriched uranium from Russia, which is set to take effect on August 11, 2024. However, lawmakers recognize the reality that the transition is going to take some time, so the law authorizes the Department of Energy to issue waivers through 2027. Centrus has been clear that we need waivers for the next few years as we complete our Russian supply contracts and to enable us to transition back to our own production.

We have also been consistent in our communications with our government partners that waivers are necessary to ensure an uninterrupted supply of fuel to the reactors that millions of Americans rely on every day for power. Last month, the Department of Energy granted Centrus a waiver covering our importations for U.S. customers in 2024 and 2025 while deferring a decision on 2026 and 2027. We are pleased with the OE's approach to the process and this outcome, which reflects a shared understanding between government and industry that new capacity won't come online for several years and avoids the near-term disruption that would harm our American customers.

We have also requested a waiver covering imports for our international customers that have their enriched uranium fabricated into fuel in the United States and reexported. And longer term, we plan to request the waiver covering imports in 2026 and 2027 that we have not yet committed to customers.

The reality is that Russia accounts for 44% of the world's enrichment capacity today, and U.S. utilities relied on Russian-origin enrichment for more than 1/4 of their needs last year. That's why these waivers are so important during this transition period, not just for Centrus, but for the industry and the country, as we work to scale up domestic enrichment capacity over the next few years.

Working together in partnership between government and business, America can do great things. We're building our domestic uranium enrichment capacity as one of them. Centrus stands ready to lead that effort.

With that, I'm going to turn things over to Kevin.

[Kevin Harrill, executive]

Thank you, Amir. Good morning, everyone. Our financial results for the quarter remain in line with our internal projections based on customer orders and deliveries. The second quarter of 2024 reflected a more than 30% increase in SWU quantities delivered albeit at slightly lower margin than those of the prior year. This was due to several deliveries in the second quarter of 2023 that were favorably priced but did not replicate in the current quarter as their fuel needs are anticipated in future quarters. We continue to generate positive quarterly cash flows, which is imperative as we focus on our future growth and pursuit of our own domestic production of LEU for the existing commercial reactor fleet and HALEU for the next generation of reactors.

As Amir noted earlier, for the second quarter of 2024, we generated $189 million in revenue and $30.6 million in net income, an increase of $90.6 million in revenue and $17.9 million in net income. Our LEU business generated $169.6 million in revenue, an increase of $82 million compared to the same quarter in 2023, reflecting increases in both the volume of SWU sold as well as the average price of SWU sold.

Our cost of sales in LEU increased from $60.8 million in the second quarter of 2023 to $136.6 million in 2024, again reflecting the increase in sales volume as well as an increase in average unit costs we sold. We ended the quarter with an LEU gross profit of $33 million compared to $26.8 million in the second quarter of 2023.

Our Technical Solutions segment also generated $3.5 million in gross profit, which was an improvement of $2.3 million versus the second quarter of 2023. On a consolidated basis, our gross profit was $36.5 million, an increase from $28 million in the prior year.

Technical Solutions for the second quarter of 2024 generated $19.4 million in revenue, an increase of $8.6 million compared to the second quarter of 2023, and reported $15.9 million in cost of sales, which was an increase of $2.3 million compared to the prior year.

Our results on a year-over-year basis reflected the transition of the HALEU operation contracts from a cost-share model under Phase 1 to a cost-plus incentive fee model under Phase 2.

In the second quarter of 2024, we continued to raise funds under our ATM offering and raised $12.2 million, or $19.3 million year-to-date, net of related expenses. These proceeds and the gross margin generated in the second quarter contributed to our ending net cash balance of $227 million and a restricted cash balance of $32.6 million for a total of $259.6 million of cash and restricted cash.

Our strong cash position continues to facilitate execution of our contractual obligations and investment in the strategic initiatives of our future. On May 28, 2024, we entered into an agreement to purchase a group annuity contract for approximately $224 million to transfer approximately $234 million of our pension plan obligations to an insurer. The annuitization will transfer the administration and benefit payments responsibilities for more than 1,000 beneficiaries, and resulted in the recognition of a $16.6 million remeasurement gain in our second quarter statement of operations. When combined with the previous fourth quarter of 2023 annuitization, the company's pension plan obligations have been reduced by approximately $420 million, which represents 90% of the obligation in the prior year. This covers approximately 2,400 beneficiaries. These transactions have significantly derisked the company's balance sheet with a reduction in both current and future liabilities. These transactions were 1 piece of a multifaceted strategy to strengthen our balance sheet as part of a strategic vision to expand domestic enrichment capacity.

With that, let me turn things back over to Amir.

[Amir Vexler, executive]

Thanks, Kevin. One final point I'd like to make, obviously, over the last few months, the U.S. political cycle has been tumultuous in the run-up to the election. No one knows what will happen in November or what the political landscape will be next year.

The good news for the nuclear industry and for Centrus, in particular, is that there is a broad consensus in both parties about the need to reclaim and advance American leadership in nuclear energy and nuclear fuel production. Our work on the HALEU cascade was launched during the Trump administration and then extended under the Biden administration. The advanced reactor demonstration program, which is funding the deployment of 2 HALEU fuel next-generation reactors and advancing 8 other innovative reactor [ designs ], was also launched by the Trump administration with bipartisan congressional support and then received a major infusion of funding under the bipartisan infrastructure law signed by President Biden.

And as I mentioned earlier, this spring, Republicans and Democrats in Congress worked together to enact a multibillion-dollar investment in U.S. nuclear fuel production, including support for LEU as well as HALEU. Regardless of which candidates and parties win in November, we expect that nuclear energy and restoring domestic uranium enrichment capabilities will remain a key point of bipartisan agreement in Washington. In the end, having a reliable, affordable, emissions-free source of energy that can meet our nation's needs 24 hours a day, 7 days a week, 365 days a year is something that appeals to people across ideological spectrum. We look forward to working with policymakers in both parties in the years ahead to restore America's status as a global leader in nuclear fuel production.

Let me close by thanking all of our investors who have joined us today on this call. None of this would be possible without your support. We are committed to living up to the faith you have placed in us and delivering the results you expect and deserve. We are happy to take questions at this time. Operator?

[Operator]

Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] As a reminder, we'll have to pause for a moment to compile the Q&A roster.

[Amir Vexler, executive]

While we wait for questions, I am happy to share that the Centrus Board of Directors appointed Ms. Stephanie O'Sullivan to our Board yesterday. Her wealth of experience and knowledge in the national security and cyber security arena, among others, will be invaluable for our future success. She joins our new Board member, Ray Rothrock, who was elected during the June shareholder meeting. We look forward to working with them during this exciting period for the nuclear industry and our company.

[Operator]

Thank you. Your first question comes from the line of Rob Brown from Lake Street Capital Markets.

[Robert Brown, analyst]

I just wanted to talk a little bit about the RFPs that you alluded or talked about. What's the timing, I guess? the HALEU's been submitted and the LEU is still -- [ going to need more time and plans to ] be submitted. But could you give us a sense on how the time lines of those play out? And are they interrelated, or are they sort of an independent effort?

[Amir Vexler, executive]

All right. So let's talk about your question about timing first. So as you know, we submitted 2 of the RFPs, and the third LEU RFP is due a month from now in September. And there's very little information from the Department of Energy exactly how and when those are going to be awarded. We can definitely guess and speculate, but we don't actually know. So I hope I'm answering your question, but those -- obviously, as we always stated, those are critical, and we view the LEU part as being critically important to us as well. As we always said, this kind of a project will require a public-private partnership. And although the timing of the government awards is up to the government, we really -- we are ready to go.

[Robert Brown, analyst]

And then on the ban and the waiver situation, it sounds like you have waivers for a couple of years. And when you -- I think you said you got a deferred waiver for the out years. Is that a process where you will then see where you're at and ask for waivers again, or how does that process work, I guess?

[Amir Vexler, executive]

Yes, so just for background, our first waiver request application -- on May 27, and on July 18, the DOE issued the company a waiver that allows us to import LEU from Russia for the deliveries that were already committed to our customers in 2024 and 2025. On June 7, we filed a second waiver request application to allow for importation of LEU from Russia for processing and reexport to the company's foreign customers. And at this point, we're waiting on DOE's determination.

So to answer more specifically your question, the company really plans to file a third waiver request application to allow for importation of LEU from Russia in 2026 and 2027 for use in the U.S. that we have not really yet committed to customers. So yes, we do have intentions to file a third waiver request to the DOE.

[Operator]

Your next question comes from the line of Alex Rygiel from B. Riley.

[Alexander Rygiel, analyst]

Could you talk a little bit about the competitive environment for the multiple bids that have been submitted as well as for the planned bid for LEU?

[Amir Vexler, executive]

Okay. Yes, good question. So we -- very simply put, we -- Centrus is not the only enricher. However, we are the only U.S. technology, U.S.-owned company in the runnings. Among ourselves and the other 2 enrichers, we're the only ones that are currently enriching and have proven technology. And so I think that positions us fairly uniquely.

As I mentioned earlier on, on the earnings call, the fact that our technology could be used for commercial and for national security provides a very unique value to the United States of America. And so there are several Western enrichers, but we are fairly uniquely positioned specifically for this bid, in our view.

[Alexander Rygiel, analyst]

That's helpful. And then, Kevin, you mentioned that the second quarter was sort of in line with company expectations. Clearly, the SWU revenue was very, very strong. Was there any pull-through there? And so should we think about sort of your in-line comment as in line for the year, but obviously the business is a little bit lumpy here, and therefore, third quarter, fourth quarter could fall off? Or have we seen a higher level of demand in the third quarter too because of these waivers? How should we think about all that?

[Kevin Harrill, executive]

Yes, that's a great question. Yes, the -- what I was referencing in the earlier comments was that it was in line, both on a quarter and on an annual basis, from a revenue perspective. So we don't expect that, to your -- to the point of your question, that we would have any fall off in future quarters based upon how strong the quarter was. We were always expecting it to come out the way it was.

[Amir Vexler, executive]

Alex, one other thing I wanted to mention to your earlier question, obviously, I was more focused on the -- answering your LEU one, but just to mention, I mean, HALEU is a big part of this bid. And we -- again, we're very uniquely positioned in that we're the only ones that are currently enriching. Okay? We're not only enriching, we're the only ones that have the license here in the U.S. or in the Western world to be able to do that. So I think that makes us fairly unique.

[Operator]

Your next question comes from the line of Joseph Reagor from ROTH Capital Partners.

[Joseph Reagor, analyst]

Amir, Kevin and team, congrats on a strong quarter. I do have a kind of a follow-on to the previous question. So far, year-to-date, SWU sales were about $163-ish million. Last year, they were $208 million. I think, at some point, you guys suggested that, because the price of SWU was up, then the total for the year might be up slightly, but the contract volume isn't materially changing from year to year, and it will continue to have this lumpiness. Has anything changed intra-year this year that would suggest the total sales for this year will be higher than your original expectation, I guess, is kind of the question.

[Amir Vexler, executive]

To answer your question, no, I don't think there's anything that's transpired through June 30 that would change what our expor- expectations are on an overall basis. I think what you're seeing in Q2 is strong performance that's largely reflective of stronger pricing. And we did have some deliveries move into the second quarter that we were always expecting that may not -- that wouldn't have pushed out in out quarters. And again, you have to go back to the nature of our business. It's very cyclical, so you're not seeing necessarily the same customer deliveries in an annual cycle. It's all based upon the utilities' needs and their reload schedules are usually on an 18- to 24-month basis. So to answer your question, this falls in line with our expectations that we forecasted at the commencement of the year.

The one thing that I would note with regards to the Technical Solutions segment is that that is going to be stronger in the current year based upon the switchover from Phase 1 and Phase 2. And as a reminder, Phase 1 was a cost-share arrangement, which we had a 50-50 distribution between the government and Centrus as it relates to that cost contribution. And in the current year, under Phase 2, we have a contract that goes up to $90 million for the Phase 2 cycle, which commenced last year in mid-November, and we'll realize higher revenues on that for the remainder of the year compared to the prior year. I hope that answered your question, Joe.

[Joseph Reagor, analyst]

Sort of. And I realize that it's limited in what kind of guide you guys can give.

[Amir Vexler, executive]

Yes.

[Joseph Reagor, analyst]

Looking a little deeper at margins, so gross margin for the LEU segment last year was about 39%. This year, it's about [ roughly at ] 15%-ish so far this year. Is that simply, to your point, timing of contracts? And how should we think about margins for the rest of this year and next year? Is this a sign that margins are starting to get weaker as some of the better contracts have rolled off? Or is this just timing?

[Amir Vexler, executive]

It's primary timing. I mean, we're still going to have different -- the different contracts delivering a different profit margins. The one thing that I would note that I think may be illuminative is that, in my earlier comments, I mentioned the higher margins in the prior year were largely due to a delivery on one of our customers that was a pretty big slug of SWU. That didn't replicate in the current year, largely due to the timing of when they take their deliveries, and we expect that to be coming about in the future. And those margins that we realized in the past for that specific delivery will be replicated at the point in time where they take delivery. Just they don't take delivery in a 12-month cycle, which is why you didn't see the mirror image of what we experienced last year.

[Operator]

And that does conclude our Q&A session. I would like to turn the floor back over to Mr. Dan Leistikow for closing remarks.

[Dan Leistikow, executive]

Thank you, operator. This will conclude our investor call for the second quarter of 2024. As always, I want to extend a thank you to our listeners online and those who called in. We look forward to speaking with you again next quarter.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.