CENTRUS ENERGY CORP Q3 FY2024 earnings call

• Industry momentum: Big tech companies making historic nuclear investments, reactors restarting, and policymakers committing to domestic nuclear fuel supply chain.
• HALEU production: Centrus selected for awards aimed at expanded HALEU production and deconversion, with a $2.7 billion contract ceiling for HALEU production over 10 years and $800 million for deconversion.
• Customer commitments: Secured approximately $2 billion in customer commitments to support deployment of new LEU production capacity in Piketon.
• Nuclear energy investments: Major tech companies like Microsoft, Google, Amazon making commitments to nuclear, and government agencies supporting reactor restarts and small modular reactors.

In the third quarter of 2024, Centrus Energy had $57.7 million in revenue. The LEU segment generated $34.8 million in revenue, a decrease of $5.7 million compared to the same quarter in 2023, with an LEU gross profit of $5.2 million in 2024 versus $10.1 million in 2023. The Technical Solutions segment generated $22.9 million in quarterly revenue, an increase of $12.1 million compared to the third quarter of 2023, with a gross profit of $3.7 million, an improvement of $2.5 million versus the prior year. Revenue contribution: LEU segment contributed $34.8M out of $57.7M total revenue, Technical Solutions contributed $22.9M.

• The company has a total backlog extending to 2040 of $3.8 billion, with LEU segment backlog ~$2.8 billion and Technical Solutions backlog ~$0.9 billion.
• Continues to leverage ATM program, with $4.5 million raised in the third quarter, bringing total year-end proceeds net of related expenses to $23.8 million.
• Further reduced pension plan obligations by $21 million in the third quarter of 2024, with $29 million remaining and funding level in excess of 110%.

• Uncertainty in timing of Department of Energy task orders for HALEU production and deconversion awards.
• Dependency on securing substantial public and private investment to build new LEU production capacity, which is contingent on finalizing contracts.

Q: Good morning, and congratulations on the progress. I just wanted to follow-up on the HALEU selection and kind of next steps. I know you laid out a fair amount of information, but how do you see the next steps? And what's the sort of timing for getting the next contracts in place potentially?

A: I'll start with your last question first. Unfortunately, we do not know the timing. It's at the discretion of the Department of Energy. Right now, everybody got selected for IDIQ awards, which would total up to $2 million and after which, we'll be waiting for specific task quarters. So that would be the next step. The amount that will be allocated to these task quarters and the timing is really unknown at this point, Rob. I mean, obviously, we're hoping it will be sooner than later. There's a lot of work to be done and I think everybody is motivated to make it sooner than later, but we really have no feel for when that may happen.

Q: Okay. And then, maybe just bigger picture as all of these new demand sources come on and view nuclear as an incremental power source. How does that change the market for you? And how do you view the overall market development, I guess, in particular it would be HALEU, but how do you view that happening now and as things accelerated there from your prior views?

A: We view all of this very favorably. Obviously, this strengthens our business case that strengthens our value proposition. More importantly, it strengthens our unique positioning in the market. Now what do I mean by that? Regardless of what's going to be built, whether it's SMR, advanced reactors or some of the multiple reactors are going to be restarted, all of them would need enrichment, whether it's LEU or HALEU. As we mentioned many times before, the amount of enrichment capacity is fairly limited and there's only four enrichers out there. Two of them are Chinese and Russians. There is three, including Centrus, that are Western and one U.S. with one U.S. technology, which is Centrus. Regardless of the build or the restart of reactors, all the demand will be funneled through the same number of enrichers. That creates a much stronger and reinforcement of our business case. All of this is very welcome news for us, particularly when you have large players like the high-tech jumping in and either direct investing or committing offtake to power, I think that is critical for the flow of investment to the rest of the supply chain.

Q: Amir and Kevin, thanks for taking the questions. First one just on the contracts, just to confirm, I think Kevin kind of touched on this a bit. The two that you were just awarded, those would likely be in the fixed or cost share structure versus like the current HALEU contract that's the cost plus. Is that correct?

A: Yes. Thanks for the question, Joe. I think at this point, the way the IDIQ instrument has been designed is, it leaves flexibility for the Department of Energy to award these in a multitude of contract types, fixed price, cost reimbursable, cost share, even [T&M] is one of the eligible contract types. We believe, as they -- for this, we're going to see it in the form of something akin to a fixed price or cost reimbursable. I think those are likely those types of contracts that would be most applicable for a build out of this nature. But I think this is ultimately going to be at the discretion of the Department of Energy, as to, how they actually issue the individual task orders and they could do it through, like I said, a multitude of mechanisms.

Q: Okay. And then, looking at kind of margins year-to-date, they've been quite a bit lower for the LEU segment compared to last year. I know you guys had timing of contracts and we all know that. But, there seems to be if you look back over the last couple of years, even years tend to be rolling down, the odd years tend to be rolling down. Is that a reflection of some of those really high margin contracts that you guys had a few years back are starting to roll-off the books and that the newer contracts that are being signed are somewhat lower margins, still good margin, but lower?

A: I think that's somewhat of an accurate statement. We have entered into contracts up and down the SWU curve since 2011. This quarter as you can tell from, where our deferred revenue balance landed at, that the majority of our revenues in this quarter were related to the contracts that we had already in our deferred revenue balances. What we see is that with margins in the current year that some of what the profits that you're seeing is from some of the contracts that we signed during the point in time, where the market was at its lowest. But it is key to remind everybody on the call that, we right now have about $900 million in backlog related to our broker trader business, and many of those contracts were signed at a point in time and where we were at a higher point within the commodity pricing curve. So we anticipate that we will still see solid margins on a go-forward basis. But, certainly, as Amir noted at the onset of the call, the way the contracts are crafted and when deliveries are taken, will be determined as to how the margins look and when the deliveries actually occur.

Q: For the new contingent LEU sales commitments, could you share anything about those customers, those potential customers whether it's customer type or maybe geographically where they're located?

A: We did come out with a public announcement that we had an agreement with KHNP, which is one of the largest obviously operating nuclear utilities in the world. It was a great honor to be selected and to be able to finalize that contingent agreement. Beyond that, most of our agreements, as you know cover down their non-disclosure. We're unable to reveal the identities of those customers. But, by the nature of what we're talking here, LEU, you could be safe to surmise that, it would be for reactors that use low enriched uranium obviously. And so, these are all utilities that are operating and require LEU to power their reactors. So this is a present market. This is existing market. This is market that can be satisfied now with the build out of our LEU capability in our facility, for which we're licensed already. And so I hope that answers the question, Ryan.

Q: Just to confirm, Amir, with that announcement in September, you had $1.8 billion in contingent sales today, $2 billion. So that does imply an additional $200 million, correct?

A: Correct. I think the math is right. I'm looking at Kevin.

Q: Got it. Just to confirm, if and as you build out LEU production alongside HALEU production at Piketon, does that affect the expected timeline at all for the first cascade of HALEU, or do you expect to bring them both online in 42 months or so dependent on receiving the appropriate funding?

A: That is a good question. Probably want to get back to you on this one just to make sure I answered it thoughtfully and have the proper backing from our team. Just my initial reaction is, it would depend on the timing. I guess what you're asking is if everything aligns both from the HALEU and LEU side, is that going to change anything in some of the earlier projections we provide around 42 months. I'm kind of reading that that's your question. If that's what it is, then we'll certainly want to get back to you on that.

Q: Hi, guys. Just had one follow-up, thought of after effects. On the current HALEU contract that's cost plus, are you guys expecting that contract to continue next year, or is that still up for renewal? Just to get an update on it.

A: Yes. Thanks for the question, Joe. That contract currently expires in November, and we are in regards to Phase II. And we have three year option periods within Phase 3. And we're currently working with the DoE to extend that contract after the period of performance ends in November. I should note that, it was aligned with the delivery schedule that we had back in November. And so the formal contract ends on 12/31/2024, but we have a -- the one year period ends in mid-November.