Perma-Fix Environmental Services, Inc. (PESI) Q3 2012 Earnings Report, Transcript and Summary

Greetings and welcome to the Perma-Fix Environmental Services third quarter conference call. [Operator Instructions] It is my now my pleasure to introduce your host, David Waldman of Crescendo Communications. Thank you Mr. Waldman, you may begin.

Thank you Brenda, good morning and welcome to Perma-Fix Environmental Services third quarter conference call. On the call with us this morning are Dr. Lou Centofanti, Chairman and CEO; and Ben Naccarato, Chief Financial Officer. The company issued a press release this morning containing third quarter 2012 financial results, which is also posted on the company’s website. If you have any questions after the call or would like additional information about the company, please contact Crescendo Communications at 212-671-1021. I would also like to remind everyone that certain statements contained within this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements on this conference call other than the statements of historical facts are forward-looking statements that are subject to known and unknown risks, uncertainties, and other factors which could cause actual results and performance of the company to differ materially from such statements. These risks and uncertainties are detailed in the company’s filings with the U.S. Securities and Exchange Commission. The company makes no commitment to disclose any revisions to forward-looking statements or any facts, events, or circumstances after the date hereof that bear upon forward-looking statements. I would now like to turn the call over to Dr. Lou Centofanti. Please go ahead, Lou.

Thank you, David, and welcome, everyone. It has been a very challenging year but I am as positive on the nuclear market as I have been in a long time. We've seen some changes going on that I think give us some light at the end of the tunnel. Our largest client, DOE has been delaying and redirecting funding towards several major construction projects especially the specification plant at Hanford and as we've discussed in the past, this has temporarily affected both our treatment and service segments. I think the other thing to realize that these have further complicated this has been the major high level personnel issues at the Department of Energy and now that the election is over, we expect a new Secretary. And on the environmental side of the Department, holds them [ph] a lot of uncertainty and personnel and vacant provisions and over there are in the future now, we expect all that to change and be refilled and to help provide some direction for the department. Of course from our point of view in this challenging environment, one of our near term priorities has been to strengthen our balance sheet, put us in the strongest position as possible. I'd like to highlight as you look at our balance sheet what we have. First of course during the third quarter, we have shown positive cash flows. So we are generating free cash. On our balance sheet is $2.7 million of cash. Over the last several quarters, we've instituted a variety of cost controls that have right sized the company following the acquisition and better matching our respective revenue. Also we have put increased emphasis in sales focused on our non-DOE clients. I think because of this we’re going to continue to be very focused on strengthening our balance sheet for long term growth. I think the result of these initiatives from not only weather the current storm but expect to emerge much stronger when we see this cycle end. And although we face a variety of headwinds related to DOE funding, I can tell you as I said earlier, over the last several months have become much more positive in the near term business outlook. As we look at our segments, first the service segment, we continue to see a variety of opportunities. We were still in the past with our expanded resource and expertise. We are bidding on a variety of large and small contracts. Even though some of the bid decisions have been delayed, we continue to expect movement in the near future. In the meantime, we have been winning smaller contracts and we have been receiving a variety of task orders under existing. The best example is Monday, we moved the team up into at Newark airport, under we have an emergency response contract with the FAA and to assist with the cleanup from Sandy at Newark and [indiscernible] airports. Fairly small contracts just worth several $100,000 but it’s a good example of the task orders we've continued to receive. Other small contracts include assisting with the decommissioning of the Sumi [ph] reactor in New York in a variety of nuclear side assessments for which are early stage cleanup. We are continuing to undertake a variety of initiatives to expand our commercial and international business. Probably the most positive development in the quarter was our treatment segment. We've seen a pickup in sales from the second quarter of 90%. I would emphasize this is sales and not recognized revenue. So this pickup is reflected both in the revenue and in the larger backlog for the quarter. As we move on here, the other issues, of course, our medical isotope production process, we have completed a prototype unit and we continue to work on the technology and hopefully we’ll be able to provide further updates as development unfolds in the near future. So as to wrap up, is we remain confident. We can achieve $130 million in sales this year even though it’s been a very challenging year due to delays and redirected spending as well as the election, certainty. Looking ahead to 2013, we expect revenue at worse to be flat but more profitable and generating solid cash flows as a result of the cost savings implemented as well as the completion of the fixed costs contract we inherited during the acquisition. With the uncertainties that exist at DOE, the upside could be significant as issues there are resolved. In the meantime we are very focused on generating positive cash, reducing debt and controlling our costs and growing our revenue. At this point, I’d like to turn the call back over to Ben, who will go into more details on our number and then I'll be back to answer questions at the end of the formal remarks.

Thank you, Lou. Beginning with revenue, our total revenue from continuing operations for the third quarter were $29.1 million compared to $32.8 million in the third quarter of 2011 a decrease of $3.7 million or 11.2%. Revenue from our services segment increased by $5.1 million or 40.2%. The increase is the result of Safety and Ecology acquisition totaled $11.3 million in revenue but was offset by reductions at our Hanford contract of $6.1 million. To drop a Hanford relates to the reduction in scope in the Plateau Remediation contracts resulting from lower headcount and time and material contracts. Our treatment segment revenue decreased by $8.7 million or 43.4%. This decrease was directly related to lower waste perceived from our government customers, primarily the DOE sites where the value of shipments received was down 43% year-over-year. In the third quarter of 2011, recall was the end of the government stimulus spending program and both proceeds in revenue earned in that quarter were up as the DOE sites attempted to spend their allocated funds. Revenue for the 9 months ended September 30th increased 18.6% with $47.2 million of the revenue coming from the SEC acquisition, again being offset by lower revenues of $15.5 million and $15.8 million from the Hanford contract and the treatment segment respectively. Turning to our costs of goods sold. Our total cost of sales were $24.7 million in the third quarter compared to $21.5 million in the prior year. Cost of sales from our services segment was up $6.1 million from prior year. Costs related to SEC were $11.1 million while costs at the Hanford contract were down $5 million primarily due to lower labor costs. Our treatment segment costs were down $2.9 million due to lower revenue and lower fixed cost of goods sold related to the cost initiatives implemented at the end of the second quarter. Our gross profit for the quarter was $4.4 million or 15.2% of revenue, a decrease of $6.9 million or 60.8%. Gross profit from the services segment decreased $985,000 due mostly to the drop in revenue at the Hanford contract. Gross profit in the treatment segment decreased by $5.9 million with gross margins of 27.2% compared to 44.6% last year. Significantly lower revenues related to the termination of the government stimulus spending program were the main reasons for this drop in gross profit. Total SG&A cost for the quarter were $4.2 million or 14.4% of revenue up slightly $4 million last year or 12.3%. Cost associated with the SEC acquisitions totaled $1 million and other G&A costs were down due to reduced incentive expenses related to profitability but offset by higher heath claims incurred. Our R&D costs were up by $145,000 primarily due to increased labor and lab expenses related to our isotope project. Our loss from continuing operations for the quarter was $343,000 compared to a net income or to an income of $4.4 million last year. Loss applicable to common shareholders was $425,000 compared to last year’s net income of $6 million. Of note last year’s results did include $1.8 million on the gain from the sale of our discontinued operation facilities. Our total loss per share for the quarter was $0.01 compared to an earnings per share of $0.11 last year. Our adjusted EBITDA from continuing operations for the quarter was $1.3 million compared to $8.1 million last year. Turning to our balance sheet, our total cash for the year is down $9.3 million primarily due to $6.3 million of cash used by operations. Much of the cash balance if you’ll recall, much of the cash balance at the end of ’11 was the result of upfront invoicing tied to our large backlog or our unearned revenue, which was $14.6 million. For the quarter ended September 30th, 2012, cash was up $1.5 million, primarily compared to the second quarter, primarily from an increasing cash from operations of $2.8 million. Our finite risk sinking funds increased by $1.9 million which brings this total restricted cash number on the balance sheet to $21.3 million. Our backlog was $9.4 million which is up $3.5 million compared to the end of second quarter. This increase relates to an increase in waste released in the quarter but not yet processed. Our total debt was $16.5 million and of the $16.5 million, PNC Bank our creditor makes up $14.1 million of this debt. Our working capital dropped by $5.5 million ending the quarter at $6.6 million. Finally I'll touch on some cash flow activity. Our cash used by continuing operations, was $5.9 million. Our cash used by discontinued ops is $458,000. Our cash used for capital spending was $412,000. Our cash received from the SEC acquisition escrow account was $1.5 million. Our cash used for the finite risk closure policy was $1.9 million and our cash used for financing of our continuing operations was $2.3 million. With that operator, we’ll now open the call to questions.

[Operator Instructions] And our first question is coming from [indiscernible].

Lou, I guess I wanted to start with the uncertainty that you believe is being removed or is in the process of being removed and maybe a little bit more granularity on that in terms of the time frame because certainly one of your competitors in the market place is not really seeing any major shifts in spending patterns or anticipating any major shifts and spending pattern over the next couple of quarters.

The uncertainty we see are: one, on the funding side. There has been a lot of question in terms of what’s going to happen to DOE's budget. Now even under the worst case which is sequestration and DOE's proposed budget would have taken a hit of more or less 10%. But it would still be in the normal range between $5 billion and $6 billion. So with a new Congress in place and the Presidential thing decided, hopefully we will see the movement on the financial side period. And as we have seen it throughout this has always been a fairly bipartisan program and never will expect a lot of cuts. So that will be removed too. There has been tremendous, there is been vacancies in the EM [ph] program at the very top. There has been questions about who is going to run it. There have been an issues hopefully and with the secretary, it’s pretty well known that he'll be leaving and they'll be appointing a new secretary. Now it may take some time, but the secretary, they usually move pretty quickly on that level of appointment.

So what type of time are you talking about, are you talking about quarter? A month? Six months?

I think you’re talking on the secretary level, you will probably see something in the next quarter. Now that can take time to filter down, so you are really talking 2 quarters so while they put in place a structure. If it works properly and that’s-- those require congressional approval, there is all sorts of issues involved with the top people so in terms of timing. Though we can see it moving a lot over the short to intermediate run a lot of uncertainty. Now I think the bigger issue is the priorities, will there be any change. We don’t expect a lot of change in priorities, but there is a lot of concern about DOE's priorities.

Okay, shifting gears it does sound that it will take several quarters. So I don’t know if we have is it fair to say that revenues again may have crossed here on this side of the business or are we still taking at some headwinds that should pressure top line revenues in this area?

Well, I think we will continue to see head winds over the next 1 or 2 quarters. We can’t see much further beyond that at this point. So what it tells-- where we think, we’re pretty close to where we think we will continue to run in this quarter.

I was just going to add that when you look at over a few years, this year is probably the lowest we have seen and so to speculate a little bit that it’s probably been a process, is probably not a bad assumption.

I’m going on my gut feel in terms of what I see how things are going behavior. I can’t give you a lot of concrete examples right now. It's just the winds are changing as we said. There will be a lot of new bids coming, a lot of stuff in the works and we’re in the middle of a lot of new things. But it’s much a gut feeling right now as anything. Now other than the third quarter was from a treatment point of view we had a very-- from a sales point of view, we had a normal quarter, we had the kind of quarter we like to see on the sales side.

But this is the question, backlog is what $9.4 million I think is Ben shared in his commentary?

Yes.

Which is up and obviously that’s to be processed over the coming quarters, so are you suggesting that backlog number, from what you can see today, is the trend of that would be down or up and then secondly that would lead to the processing side. If you think it’s down then either you’re processing more or receiving less I guess right? So just trying to see where you’re at in the cycle of a slower spend, a change in the office and something that's not been very positive, at the DOE level.

Yes I think for 2012 which is going to be is proving to be a low year we are in the high, we are in the peaks of the spending. Fourth quarter is looking decent and we haven’t seen a fall off. So it’s continuing not quite as strong as third by-- as where we can tell today but decent fourth quarter but then you have seen enough of these trends at first quarter trends to fall off. So will it be as bad as the first 2 quarters in 2012, that’s sort of the open question. But we are seeing the sales and waste receipts coming in at a much better pace than we saw the first half and that has the big impact on the waste, on the profitability as that’s our strongest margin business.

Great. Okay and then if I did my math right, on the service side it didn’t seem to be very profitable in the quarter. And I just wondered if you maybe could talk through that and so much maybe why is this quarter but in general is this mix of business with the acquisition now with almost a year now into it. How would you characterize or assess this transaction and how should we think about the mix going forward?

Let me answer one part and Ben will answer the second. It’s one -- as I have said, continually it is almost a tremendous amount of assets and resources as we have looked longer term, very pleased with it. Especially in terms of the potential the west has provided us on the nuclear side in terms of help physics, in terms of expertise. The negative has been our one contract and Ben will more discuss that.

Yes I think will let this 3 comments I would have one is the general lack of government spending, I think what we didn't anticipate was the dramatic slowdown in awarding a contracts. So from a revenue perspective we expected more revenue, the other thing was from a profitability standpoint, we’re just now entering where we kind of flushed out the excess cost related to the acquisition, the first 6 months certainly it was duplication of labor and other things as we rightsized and transitioned the company. And certainly as Lou said the problem contract, when I take out the expenses related to that, our margin isn't quite where we wanted it to be yet but it’s certainly getting closer. We have got a next to nothing margin for the quarter. That number moves up to about 12% when I adjust for the problem contract which should be materially over by the end of this hopefully this month but this fiscal year certainly. There will be some small lag but nothing that can impact the numbers next year. And so the margin moves up more to what we sort of projected and again we have also this year because of the dramatic reduction in the receipts on the treatment side, we also saw combined lower margin than normal. We saw third quarter's margin up in the 27% range for treatment. So that’s kind of back to our what I will call normal processing, it can be higher when we get higher margins waste and slightly lower when we get lower margin waste. But that’s back to where we like it to be. The services side as we start to win some projects and continue with our cost reduction efforts. We are very successful with our cost reduction implementation at the end of second quarter. B but we saw those come in. So we are just getting through this contract and then I think things will start to look like we had anticipated.

But hold on until the end of the year on the services side is what you’re suggesting?

Yes I think from the numbers financial point of view yes.

So if you take a step back and sorry for all the question, but if you take a step back here and exclude the treatment side on the federal, how would you access the market for the growth in your end markets or the growth in business opportunities sort on a rolling forward-looking 12 months here. And is this something where we’re still going to be burdened by financial budget concerns and on the commercial or industrial side spending patterns that may not be as optimist now as maybe after the first debate and we have now a repeat president.

The key with which we have done is very much focused on non-DOE clients. We have tremendous expertise and have in several other areas of non-DOE work. One is seeing over firm and defense and also on the commercial side and then also on the international side. We see a variety of new projects in those areas starting up much greater than we see it at DOE today. And in areas there where we have had tremendous success, especially SEC in terms of its history. So, we see a lot of opportunity. We do see big challenges with DOE until its little clearer what's going to happen on the federal side. Although we do see opportunities there, we continue to see it and chase them at DOE. The problem there is just they are pouring a lot of money into the waste treatment plant because they enter the [indiscernible] plant. And that is consuming a big part of their budget right now. I don't know if I answered your question but what we see is a variety of new opportunities out there in some of these new areas that…

If I may respond, actually you didn’t answer my question.

I didn’t answer it?

Because my question is ex the DOE, it does not sound, your confidence level about near term growth getting or lift in revenue on non-DOE business the next 12 months is not high and therefore investors should not look for necessarily an improved profitability profile of company. I guess is really the tip of my question.

Is that if you remember my guidance is seeing fairly flat revenue but because of our cost initiatives, you’ll see and with and as we sit today, our problem contract is winding down as we sit here, the cost savings that we've already instituted, the changing profile that we have, you’ll see in much more profitable operation in terms of, but as we sit today, our guidance has been fairly flat from a revenue point of view which assumes we’ll win some, that we’ll make up for any drop-off on the service side.

Maybe I should [indiscernible] but flat on revenue would be, you’re saying $130 million?

Yes.

And why is that flat? I think you just $118 million, $119 million last year and then the SEC acquisition, if you strip that out, I would imagine you’re down.

Well $130 million was also our projection for this year. So we see flat in that sense.

And our next question comes from Craig [indiscernible].

Just a real quick question. Could you expand a little bit more about the medical isotope prototype that you did mention and perhaps give us some additional clarity on that?

Yes, what we've done, we've built the prototype so you come in my office and see it sitting there. The key there is we’re continuing to go through testing and in terms of activity and the ability to commercialize the technology. We’re looking for partners and in terms of assisting with the technology and we’re continuing to develop auxiliary technology around our existing technology and working with them on some licensing agreements on that we have options for with CNN and with the National Labs with their technologies. So everything is still moving. And hopefully in the near future, we’ll have more to talk about it. But I think a key part of it is we're very focused on looking for a partner in the field that can help us.

Do you have a number of candidates in that area?

Yes, there is a variety of possible candidates.

Our next question comes from Michael Potter.

Just to stay on the medical isotope side, have we hired a third party advisor to assist the company in going out to these potential partners?

I've interviewed advisors. We have advisors in different areas, I mean advisors in the sense that we've hired technical people as consultants who have done this and have worked for some of the other isotope producers and we've had discussions with advisors.

Okay, I am a little confused. So we hired advisors to help us develop the prototype and the technology?

Yes. In the medical field, we hired experts that have done this before and who are experts in generator production and FDA approval.

Now have we also hired anybody to help the company with seeking a joint venture partner? Who is going out on behalf, Lou, to determine who the appropriate groups are that the company should be speaking with?

We have advisors who are doing that. And the consultants in this area and so we’re talking to them, it’s a very limited business and we’re talking to the major producers and anyone in that business. So we have consultants who work with us in that field that are advising us.

And they are the ones that are in dialogue with a potential joint venture partners?

Yes.

Again, I was a little late on the second half of the call here, but has the Los Alamos past quarter been discussed at all?

No, as we sit today, nothing will, they have issued no task orders to anyone. They are varying from a DOE point of view is a very embarrassing sort of-- they are saying next quarter, they will be issuing task orders but we'll see.

Next quarter maybe Q4 or Q1 of 2013?

Q1 of 2013.

And what's been the issue?

Procurement. Their excuse is that their procurement issue in terms of their ability to issue the task order.

And we actually do have another question from [indiscernible].

Just a quick question, you said relatively flat next year, did you give us some idea if there are any swing factors in your mind that may change that?

Yes, the flat revenue is based on probably the worst case of DOE. And the swing factor is, we have a variety of projects we are either proposing or they've proposed back to us and that we’re working on. Any of those really hitting could have a very positive effect on the numbers. Just look at the number, and we could see that and $130 million, that's a pretty long number for us and any movement at all at DOE in terms of priorities or in terms of some of these new initiatives especially with the higher activity waste and true waste and other things. There are some great opportunities there that could dramatically change our numbers and we’re pushing real hard. When I comment, I guess on what I see at DOE, for the last year, we've really seen paralysis and in terms of the ability to do anything new or try to deal with some of their problems and with the change going on now, with the election past us, and to be honest with you, I would have probably said this whoever won, because it’s a fairly bipartisan program as I have always said in terms of support both in Republic and Democrats. Now that we’ll see changes going on in terms of management, in terms of priorities. Hopefully we can move some of these other programs forward which would help us. So I'm optimistic at the moment because of that. So yes, there could be a lot of upside with a very small or 1 or 2 of these programs hitting.

Okay now, there appears to be no further questions from the point at this time.

With that I thank you all very much for your patience and look forward to talking to you next time.