Perma-Fix Environmental Services, Inc. (PESI) Q2 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Perma-Fix Environmental Second Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. David Waldman of Crescendo Communications. Thank you, sir. You may begin.

Thank you and good morning, everyone and welcome to Perma-Fix Environmental Services second quarter 2015 conference call. On the call with us this morning are Dr. Lou Centofanti, Chief Executive Officer and Ben Naccarato, Chief Financial Officer. The company issued a press release this morning containing second quarter 2015 financial results, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at (212) 671-1020. I'd 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 statements of historical fact 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'd now like to turn the call over to Dr. Lou Centofanti. Please go ahead, Lou.

Thank you, David and welcome everyone. Very pleased with the dramatic improvement in our results compared to prior year, but I’d also add far from satisfied given the vast landscape of opportunities we’re seeing in our unique resources that we have at our disposal. Our business improved during the second quarter '15 with a revenue increase of 29% to $16.4 million versus second quarter of last year. Much of that growth occurred in the service segment where revenue increased 61.5%. This growth indicates we’re winning more work and contract awards appear to be picking up. Within the treatment segment revenue increased by 18% to $11.1 million versus same period last year. This was due to higher waste volumes. Due to the timing of shipment hours some of the revenue we had expected in the second quarter was delayed and came in, in the early part of the third quarter. Nevertheless, our sales pipeline continues to improve. We anticipate government spending to increases as we approach the government’s year end and we are off to a strong start in the third quarter and extremely encouraged by the outlook for the second half of '15. As a foot note especially on the treatment side is the foot note, we were very pleased to see yesterday that the Senate approved the appointment of Monica Regalbuto as Assistant Secretary for the Department of Energy’s Office of Environmental Management. We hope this position, which has been vacant for close to five years will provide the leadership for DOE’s environmental cleanup efforts. Moving on we had substantial improvement in our margins with gross profits increasing 159% and gross margin increasing to 24.7% compared to 12.3% for the same period last year. Additionally, we achieved adjusted EBITDA of $2 million compared to a loss of $400,000 same period last. We felt slightly short of our EBITDA target for the second quarter, but this was due to the timing of the shipments that I had mentioned earlier. As such we remain confident in our prior guidance of $6 million to $7 million for the full year. As we have explained on the previous call last few years have been particularly challenging for the industry as government funding for nuclear waste cleanup was curtailed for various reasons and one of the major again was just the lack of leadership at the top of DOE's environmental cleanup and the agency. With the appointment of the new assistant secretary we're somewhat excited that we think we’ll see movement on some of our top priority projects. However, we continue to focus on diversifying our revenue and to non-DOE area and we believe this will continue to lead topline growth together with our cost initiatives undertaken the streamline operations. We will continue to see improvement in our bottom line. I am also pleased to report some new developments on our medical isotope side of our business. In early June we reached an important milestone in terms of scaling up our prototype generator for commercial production by achieving or demonstrating a curie level system. This was a major achievement within the industry. We not only exceeded industry requirements in many emerging markets, but are now moving rapidly to demonstrate our superiority over traditional processes in North American and European markets. Based on these results we remain convinced that our process has the potential to reshape the global supply chain of Tc-99m in the U.S. and around the world. Following our earlier success at the two curie level we have attracted significant interest from within the industry further validating the significance of our process given our latest four curie level and near-term plans to scale up even further. We're moving forward aggressively with our plans to formalize additional partnership, prepare for regulatory submission and ultimately commence commercialization of the process. Also we finalized our agreement with Digirad whereby Digirad invested $1 million in our subsidiary from the fixed medical, which is listed on the Warsaw Exchange. I would point out they invested a slight premium to current market, which is further illustrations of the growing interest in our process from within the industry. As part of the agreement, Digirad will purchase -- also agreed to purchase quantity the Tech-99m for its nuclear imaging operations upon successful completion of development of the new Tech-99m. With all that is going on within the medical side, we’ve made some major additions to our Senior Management Team at Perma-Fix Medical. Steve Belcher has been appointed Chief Executive Officer of Perma-Fix Medical. Steve brings 19 years experience in the nuclear pharmacy sector. By way of background Steve was one of the founders and principals and former Vice President of Triad Isotopes, which is the third largest nuclear pharmacy in the U.S. Steve has also served as an Officer and Principal Architect of multiple ventures and was the Chairman of the Board of the Association for Independent Nuclear Pharmacies. As you can imagine when you see his resume, he brings tremendous network and creditability from within the industry. John Climaco was also appointment Executive VP of Perma-Fix Medical. He was Co-Founder and former President and CEO -- former CEO of Axial Biotech a molecular diagnostic company. John has served as a member of the Board of Director of Digirad, Infuse Systems Holding and is also a Board Member of course of Perma-Fix. So as to wrap up we're encouraged by the outlook for our business given our growing sales pipeline within the service segment, our improving outlook within the treatment segment. Looking ahead we anticipate a strong second-half of '15 and remain confident in our prior guidance. As I mentioned before we continue to bid on a variety of large contracts and continue to believe we are in a good position to continue to win contracts. We appreciate this support from our investors and the dedication of our employees. At this point, I’d like to turn the call over to Ben who will go over in more detail on the numbers. Then I’ll be back to answer questions at the conclusion of our formal remarks. Ben?

Thank you, Lou. Starting with revenue, our total revenue from continuing operations for the second quarter was $16.4 million compared to last year's second quarter of $12.7 million, an increase of $3.7 million or 29.2%. Our treatment segment revenue improved by $1.7 million primarily due to improved waste volume while our services segment improved by $2 million as a result of improved project revenue compared to prior year. For the year to date our revenues is greater than prior year by $6.8 million or 29.1%. Our cost of sales was $12.3 million in the second quarter compared to $11.1 million in prior year. At the treatment segment, our costs of sales actually decreased $319,000 or 4% compared to prior year. Despite the higher waste volume, our variable expenses were lower primarily due to lower disposal expenses. In addition, we were also able to maintain our fixed cost despite the significant revenue increase. Our cost of sales for our service segment was up $1.5 million basically related to the variable expenses that go along with the increased revenue. Our gross profit for the quarter is at $4.0 million or $4 million compared to the gross profit of $1.5 million in 2014, an increase of $2.5 million. Gross profit at the treatment segment increased $2 million compared to prior year. Again the increased volume and the higher margin waste stream were the main contributors to this increase as we maintained stable fixed costs despite the increased workload. Gross profit at the service segment increased $465,000 as our current services segment as it is today improved by $950,000, but was offset by lost gross profit from our engineering group, which we sold in July of 2014. Year-to-date our gross profit at June 30 was higher than prior year by $3.9 million. Again both segments have increased their revenue. They improved their profitability and they've lowered their fixed overhead cost and all of this is contributing to the improvement. At the G&A level, our costs of sale, our SG&A costs were $2.9 million for the quarter compared to $3 million last year. Our labor costs are down although there is an offset with higher consulting expenses and for the year, our G&A expenses stand at $5.8 million compared to $6.2 million last year and similarly lower labor costs have been offset by higher consulting expenses as we continue to focus on administrative cost efficiency. Our income from continuing operations before taxes for the quarter was $443,000 compared to $2.3 million loss last year and included in these results is $432,000 of expenses and $184,000 from Medical Isotope business for Q2 '15 and '14 respectively. Our loss applicable to common shareholders was $154,000 compared to last year's net income of $11,000. This year's loss includes $281,000 of expenses, which represent our portion of the Perma-Fix medical expenses, but it also includes $713,000 of expenses in our discontinued operations. Couple of unusual hits were discontinued in our disc-ops is a $150,000 asset impairment of our Perma Fix Michigan property, which is non-cash and a charge of approximately $201,000 in connection with our Georgia Facility. Last year’s income from disc-ops also included a insurance settlement gain of $3.5 million related to our Georgia Facility. Our earnings per share for continuing operations were $0.05 compared to last year's loss of $0.21. Our adjusted EBITDA from continuing operations as we defined in our morning press release was $2 million compared to a loss of $426,000 last year. For the year our adjusted EBITDA is currently $1.6 million compared to a year-to-date loss of $2.6 million or swing of $4.2 million to the good. On the balance sheet, our cash was down from year end by $2.6 million and that's primarily related to operating cash needs related to first quarter losses. Our total receivables remain relatively flat including unbilled. Our waste backlog stands at $5.7 million compared $9.2 million at yearend and $6.1 million a year ago. Our current debt is $3.7 million, which is consistent with yearend and our total debt at the quarter end is $11.2 million broken down as $9.5 million to our lender P&C bank and $1.7 million for our shareholder loan and some miscellaneous loans of $35,000. Finally our cash flow summary, our cash used in continuing ops was $1.3 million. Our cash used by discontinued operation was $800,000. Cash used for investing was $282,000 of which $265,000 is cap spending and our net financing cash flow used is $223,000. With that I will now turn the call over the operator for questions.

Thank you. We'll now be conducting a question-and-answer session [Operator Instructions] Our first question comes from Al Kaschalk with Wedbush Securities. Please go ahead with your question.

Good morning, guys.

Good morning, Al.

Ben could you just a real housekeeping item here I missed the backlog numbers, could you repeat those please.

Yes. $5.7 million is June 30 backlog. $9.2 million was the yearend number and $6.1 million was June of 2014.

What was that $331,000?

6.4.

Okay. So the conversion here for the second half and as we think about the EBITDA guidance what you've here to date, I think it’s about a $5 million number to get to the midpoint. Is the majority of that going to be in the third quarter or is it going to be relatively even across those two quarters?

Well as you know, it could be either depending on timing. What we see coming right now it's a little heavier waited to third quarter, but not entirely. We think both quarters will be strong, you will either see a very high EBITDA in third and a lower backlog or a little lower, but then a backlog to support the fourth.

Okay, but I think you made a comment or in your prepared comments there was commentary about shipment that was received in July it was deferred or delayed in Q2. Are there -- are they planned or do you expect larger shipments or what’s the comfort level on its conversion there.

Yes, not larger, but just more shipments with the yearend budget spending and what we've seen with the DOE and their plans.

So it arguably mean higher price point waste therefore the incremental margin.

Correct.

Okay. Switching quickly over to the service side, you talked about some project wins. Lou could you maybe talk about shipping away what happened on the engineering side, but as you look at this business, I view this as more of a steady state business that spins off some -- puts off some cash flow, but could you help us understand A; the nature of the wins, B; the duration and the confidence level that there is still a fair amount of work to be awarded as we think about the next six months.

The business is very much -- our greatest successes is in what’s called health physics. We have a very strong technical group that provides health physic support for a variety of projects that also leads us to actually lead some of those projects to be heavily involved in the clean up. They also generate then of course waste. So we've seen a very steady win on lot of small projects and so the business through the first part of -- the first half of the year has been a variety of small projects that its even hard to talk about because of their size and we continue to see a variety of those kind of projects appearing and many of them aren’t even bid that they're pretty much sole sourced on the private side. So we see that providing lots of singles for that group providing base work. At the same time we have several larger projects that are out there that we have a lot of confidence we're going to be on the winning teams where again we offer some part either technical services on health physics or the technical service on the waste side. So as we sit today and they compliment -- again the reason we've always been interested in and they are very much complement what we do on the waste treatment side and we work hard to try to leverage our facilities into those operations. So as we move ahead here we continue to focus on that and that’s been a really sort of the bread and butter over the last two years with the delays and problems we've seen at DOE. Now with the new appointment here, we’re hoping we see a little more leadership there and a little more strength in the programs at DOE, which should help us and so we were quite excited about her appointment here yesterday. And I am not sure that answered your question.

I guess I want to stay focused on the commentary that would suggest on the service side that the larger contracts that you have been talking about still haven’t converted over to awards, the wins that you did announce are a number of smaller projects and given what I believe is a renewed focus on bidding correctly or being awarded profitable contracts this should help the operating profile of the business.

It helps the operating profile, because it gives us much longer term projects. The ones we're winning are one, two and three year projects whereas the bigger ones are three to five to 10 year projects. So we of course like the larger ones because they provide a base that we can really plan ahead on. So we have a ridded those out there and we're pretty confident we'll see some wins here in the very near future on the bigger ones. But the bread and butter over the last six to eight months have been all the singles we've been getting.

What does near term mean?

Near term is the next two months.

Okay all right. No lets an award in the timeframe I am sure folks will hold you accountable for that, but let's hope they can't. Real quick on the medical side good progress here, glad to see the funding am I still -- are we still correct in that, A, what's the -- now your ownership as a result of this investment where does your ownership percentage go to?

60.5%.

And the funding -- you are not funding any cash into this -- it's now fully funded or there would be some type of either A, another investment or some type of equity as it relates to the need for cash here.

Yes, we're keeping the companies separate, yes.

Okay. And then Lou what's the next -- what are the next milestones here? Whether they will be technical getting from four to six per year, what’s the timeframe here?

Over the next several months our next goal is to demonstrate the slightly larger system probably like you had just said about a six curie and that’s the system we really want to focus on. So the next step -- several technical steps are very much focused on demonstrating that and then developing a base of data around that system. That will readily compete both in the European and North American markets. So that will be -- that’s a very critical step for us and we're pretty fairly confident that after the four curie test we were fairly confident we can design such a system at this point.

And from a technical standpoint, a medical standpoint could you help me at least the four to six timeframe will get to a size that’s largest system.

Probably over the next two to three months, we've already started test to demonstrate it, we’ll build up a base of data and then should be able to demonstrate it in this -- over the next several months.

Okay. Thank you very much and good luck. Appreciate your time.

Thank you. [Operator Instructions] Our next question comes from the line of Robert Manning a private investor. Please go ahead with your question.

Could you help us quantify the size of Tech-99 opportunity and little more about the steps to get there? Now I understand the world market for Tech-99 generator is something like $500 million in the U.S. and a $1 billion worldwide and then its dependent on bomb grade uranium for virtually the entire amount of that. Are my numbers correct and what percentage of that market could switch to our technology if we can prove it works?

Well as you've done a good job with the market in terms of its size and we're confident that we can focus on a very large fraction of that. A six curie system and that’s why we focused on the six curie, we think we can eventually even go to a larger unit, but whether you send a client two to three of these units, but today with a six curie unit we're very confident we can go after somewhere between 40% to 60% of the existing market. A little more in Europe and a little less in the U.S. so today they use much larger generators, but again I think it's mostly the nuclear pharmacies are driven by price and if you can provide them two units that are cost competitive with one unit they would go with I believe the cheaper route. So we think in the end we have a market we can focus on that would be extremely competitive at six curies.

So does that mean a 40% to 60% that we could $400 million to $600 million worth of Tech-99 generator using our technology down the road say five years?

No the potential here is mindboggling and you see it in the whole discussion with the uranium operation and what the U.S. Government has done with Iran and their interest in focusing the Iran systems away from uranium on to some of these non-uranium system. So we see tremendous pressure coming right now from the government to try to get -- number one and it's coming and its going to happen is one getting people off highly enriched uranium especially with the closing of the North America -- reactor in Canada and then two; is the government’s slowly cutting off everyone from highly enriched uranium and forcing them into non-uranium or at least low enriched initially routes. So we see a mindboggling opportunity there. It is a great opportunity for us and we think we've got a technology that is as good as anything out there that we see today.

We're not trying to quantity mindboggling a 40% to 60% of a $1 billion to $400 million to $600 million that to me is mindboggling is that we're talking about is an opportunity.

Yes what's you’re talking about, you look at as we get down the road we get very little value for this technology today and the value of this company. And everyone on this call knows how to calculate what things are worth and all you need to look and do is you got a technology that could totally disrupt that whole market and become the center piece of what everybody is doing. Yes the $500 million in revenue would translate into a very dramatic valuation for that technology.

Now we’re not going to sell all these generators in sales, and this means if I understand, this means somebody is going to sell $500 million worth of Tech-99 generators. We're not going to sell them ourselves I presume I guess there is a lot of ways to get our value for this. I assume it's maybe licence it. So we obviously don’t get the whole say $0.5 billion of revenue here. But on the other end we own and have the key technology, so regardless of whether we licence it or get somebody else to make the stuff for us or what -- we ought to get a pretty good share of that $500 million, shouldn’t we and how do I quantify that?

Well we should and its really the reason we have brought on a person like Steve Belcher. We need some and there are a variety of paths forward here that we need to carefully think through and keep all options open. So in our planning we have been careful to work with all the existing players because the easiest path is do we have a major partner that already has a distribution system and everything else, but along those line, we can’t depend on that. We have to look at developing a system where -- as one of our options we’ll go to it alone and sell the units and go after all that revenue.

Yes.

So we have multiple paths to market here. Right now we're exploring and looking at and keeping all avenues open, but one of the paths is that we do what you said is possible is we move forward on our own to market the generators and then sell also auxiliary services that go along with them.

Now it's obviously like you don’t know right now and the stuff you know that you can’t tell us, but what would a knowledgeable observer of this industry say would be the range in license fees that you get if you do decided to that? I mean I've got no idea if it’s like 5% or 25% or anything else and obviously you can't be too specific, but just what would a knowledgeable observer of this industry say would be the range.

Well again you have multiple paths and multiple opportunity. So it’s real hard to say, but 15% is not unusual and depending on what part of it -- what you’re really doing and what part of it you're looking at.

Okay but we got some really proprietary and its dramatic. this is not something you have give away for like 2% margins.

No we're not going to do that, no.

Now steps from here to there in response to an earlier question you talked about you're going to go six curies and I guess even though you will be pushing it ahead to improve that, but that seems to be good enough to go ahead and comply with data to get FDA approval. What can you tell us about that path and at what point do we begin to accumulate the data? At what point we have enough to file whatever is the equivalent? I know it’s not called a new drug application in this area, but when -- what path to filing and then how long does the FDA have to work on. I understand they've been sitting he NorthStar thing for two years.

Yes and we see a little difference between ours and NorthStar. They have a very complicated system at the client level, which raises issues with the FDA. Our system would be practically identical to an existing unit, basically for selling in the top and now the bottom comes Tech-99 so extreme simplicity and we work hard to keep it that way. So we see that part as being a little lower risk to us than what is happening with NorthStar. This has taken a little longer when we initially got into this is novice is without leadership like Steve Belcher I was predicating FDA submit a little sooner than we've been able to pull that off. And I think with his guidance we've now see much harder at developing data and going into FDA with a very solid case. So right now we’re very focused on getting to a six curie number two and then developing the background data. Will we be able to do that and have something which can really show FDA by the end of the year, possible but unlikely its now going. In three months we could have a six curie unit, but then we'll have to go through several months of testing on that unit. So it will be some time after the first of the year.

But it's not reasonable sounds like by mid 2016, we've got an FDA submittal and then how long for them to decide?

Our feeling is and we have again several options we could take with them depending on which one it could be. The shortest the most efficient could be three quarters of the year to about a year and a half. Depending on what route we go. So about a year give or take -- about a year after that. And that mostly apply for the FDA. I think that’s probably a major milestone, the application to the FDA is a major milestone. It will then attract we've gotten lots of attention with the announcement on the four curie unit and when we're able to talk about a six curie unit it will even attract more and to me the big event really is FDA submittal.

Well bigger is FDA approval I guess, but FDA submittal is pretty big.

You’re right exactly.

Okay and then from then on FDA approval you don’t then open the door the next day and you’re selling 50% of the market what happens, then you sign with a major partner, then you contract with somebody to manufacture the stuff and we sell it. How long does it take to get from FDA approval to this big revenues?

Well the day we apply we’ll be very focused on the next step, which is exactly all the above which you said. There is three or four ways we could go and we’ve already mapped those all out, but still…

Okay, That’s great. Thank you for your time. Most sorry to take so much of it, but thank you.

Thank you. [Operator Instructions] Our next question comes from the line of [Justin with Prolenta Investment Group]. Please go ahead with your question.

Okay. I just have a quick housekeeping question and I apologize if you’ve already addressed this, but what were the 313 developed cost related to the medical isotope project for this quarter.

$432,000 was the total cost and of course we at our ownership level we incurred $281,000 of that.

But it was by comparison last -- in the first quarter that was around $400,000 your portion.

First quarter it was $395,000 yes.

And then going forward, how to you expect that to play off.

That’s probably about where we’re going to be -- were probably about the same on the research and technical side, but with the new management a lot more administrative kind of business development type expenses. So I would say probably through the rest of the year this quarter is probably a good indication.

And your portion about $300;000 or less.

Yes

Okay. Great. Thank you very much.

Thank you. Our next question comes from the line of Bill Chapman with Morgan Stanley. Please go ahead with your question.

Lou and Ben, good morning guys.

Hi bill.

I was curious on the hot cell, have you guys have that delivered and is it installed?

We’re still working on it.

Okay.

So we're very close to finalizing it and moving. We're working on actually as I may have told you that we’re buying a used hot cell and we’re going through now the regulatory hurdles to move that hot cell to our facility and that will help us significantly in terms of our work of course having our unit. Right now all our tests are being done with outside contractors. So outside facilities. So this will allow us at our research operation to actually run our own tests on the Tech-99 dramatically more efficient and speed up the process.

Okay. I was going too what you have over $20 million in your sinking fund, is there any way you could tap into that slightly to help fund the Perma-Fix Medical if it had more needs for capital to keep your ownership up.

The quick answer is no Bill. That $20 million is used to secure $43 million of bonding that we require for our facilities and even if we were to reduce the number of facilities that number contractually would stay, it was -- just the $43 million might come down but the $20 million wouldn’t. So right now that’s pretty much a restricted cash.

Okay. Let me ask you one more question on -- you mentioned you’ve generated substantial interest in your field for the resin, are you also getting interest from people that aren’t in the business on producing the generators?

Well we’re seeing interest through the whole chain from people who today actually radiate and make the uranium to people who are users like Digirad. So we are -- I guess to put it slightly almost overwhelmed by the interest rate now and working with it. So we see lot of interest through the whole chain and including generator distributers and even people throughout the chain. We become recognized this is in the industry.

Okay. And you still anticipate let's say a generator manufacture that this will be a substantially lower cost alternative for them? Do you still anticipate that to be true?

I would just have to explain to you how this system works today your radiate uranium with the present system and with that you get a dramatic increase in radiation that you must deal with. The uranium system produces extreme radiation so you need very, very sophisticated hot cells to process it. You produce waste that has no home that cost the fortune with our system. If you're radiating natural molly, which is itself become entirely radioactive, but does not produce the byproducts and the radiation associated with those byproducts. So you get a much simpler system to work with requiring much simpler equipment, much simpler handling cost and then the second is its very de-centralized system. So you could produce it at almost any research reactor and so there is not a need to make it in Austria and then how to figure out how you're going to get that to the U.S. So with a material that has an extremely sort half life where logistics becomes just the ultimate nightmare. So we see dramatic savings throughout the whole chain using our technology and that’s why we're so confident here, no matter what other system we have to compete with. The cost savings are dramatic throughout the whole production distribution chain. So we're very confident on our costs, our ability to do this competitively.

Okay. Good. Thank you very much guys.

All right

Thank you. Ladies and gentlemen we have no further questions at this time. I’d like to turn the floor back over to Management for closing remarks.

Once again, I’d like to thank you everyone for participating in second quarter conference call heading into the third quarter and balance of '15 we expect to continue revenue growth and strong cash flow. We continue to pursue a variety of large contracts and aggressively moving ahead with our Tech-99 process. We have been participating in a growing number investor conferences and keep you informed by press releases where we will be presenting and our progress in continuing to grow the company. Thank you all very much.