Perma-Fix Environmental Services, Inc. (PESI) Q4 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Perma-Fix Environmental Year-End 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. David Waldman with Crescendo Communications. Thank you. You may begin.

Thank you, Matt. Good morning, everyone and welcome to Perma-Fix Environmental Services fourth quarter 2015 conference call. On the call with us this morning are Dr. Lou Centofanti, CEO and Ben Naccarato, Chief Financial Officer. The Company issued a press release this morning containing fourth quarter and year-end 2015 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'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 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'd now like to turn the call over to Dr. Lou Centofanti. Please go ahead, Lou.

Thank you David, and welcome everyone. Very pleased to report that we achieved this $7 million of adjusted EBITDA, which is the top end of our guidance to almost double what we reported last year and as we look forward we are on track for another very stronger year in 2016. As you know, we’ve been very focused on continuing the growth and then improving the profitability of the Company. As we look to 2016, we see continued significant improvements in both the Treatment and the Service segments. Also, likelihood of entering some new exciting markets that we will discuss later in this call. I would like to also point out that [indiscernible] for our medical subsidiary would have shown positive income from continuing operations. But since we are the majority owner of Perma-Fix Medical, we must consolidate the financials even though this entity is independently funded. We are making tremendous progress on our medical subsidiary, which I will discuss in more detail later in the call and Ben will give more color on the financial impact of our medical subsidiary. Turning first to the Service segment, happy to report revenue increased 43% in the fourth quarter to $5.5 million from $4.4 million from the same period last year. We continued growth in our Service segment which provides a very predictable revenue stream. Moreover, we see significant opportunities here as we continue to build our [resonator]. At the same time, we are in a much stronger competitive position as the market continues to consolidate and weaker players have exited the market. As an example of our recent success, we are selected by the Navy as a part of the wining team on the $240 million five-year contract for environmental remediation services at various Navy instillations. We are acting as the subcontractor on this award to CH2M Hill, the prime contractor of the project. CH2M Hill selected to work with Perma-Fix due to our close working relationship and in fact that we are uniquely qualified in terms of characterizing, remediating, surveying radioactive materially impacted size. With our vast waste characterization and treatment knowledge and experience, we are able to provide a comprehensive solution for site environmental remediation projects, including turnkey radiological services from characterization through decommissioning, decontamination, and final status survey. While we can’t provide the specific dollar amount to Perma-Fix on this contract it’s suffice to say in a typical contract like this we anticipate about 15% to 20% of the total project award. This is just another example of the many opportunities we see going forward in our Service segment, which just continue to do better and better over the last year and a half. Within the Treatment segment, revenue climbed in the fourth quarter compared to the same period last year, but this was due to - and large part because the timing of certain large waste treatment projects that were pushed out to later this year. And we expect to receive these shipments in the second quarter, which should boost our treatment sales beginning in the second quarter and we expect a very strong remainder of the year in treatment. Because of that I’d point out, we do expect some weakness in the first quarter due to these delays and nevertheless we have improved visibility, primarily as it relates to government spending and commitments by the government in terms of waste shipments that they anticipate sending us over the next year. Thus we anticipate solid growth in both our Treatment and Service Segments in 2016. At the same time, the opportunities outside DOE continues to be encouraging as we continue to focus on commercial and international that will help diversify our revenue. In addition to our low-level mixed waste treatment business which we anticipate will grow in 2016, we see emerging opportunities in the high level area, which represent even larger potential market opportunity. For all of you have been following us for years you know this has been one of our - and my top priorities is moving into high-level waste streams, where there are no available treatment options. The market for these waste streams [dwarf] anything we have done in the past. Importantly, we believe we have the technology permits and facilities in place to treat a variety of high-level waste streams. Turning now to the medical side of business, we continue to make progress on the regulatory front as well as putting the Company on a more solid footing from a capital markets perspective. We are considering a variety of option that will bolster the strength of the subsidiary including both strategic and capital market options. We now have the required management and regulatory expertise in place and the feedback from within the industry from both distributor and end user has been extremely positive. Believe we are in a position to dominate this billion dollar market as our process this lower cost does not use government-subsidized, weapon-grade materials and can be readily deployed and standard research and commercial reactors worldwide thereby solving the global supply chain concerns for this critical Medical Isotope. So to wrap up, we remain very confident and the outlook for 2016. In 2015, we saw adjusted EBITDA nearly doubled. For 2016, we anticipate continued growth in both treatment and services and with [any of that] should make headway on treating high-level waste streams which could be a true game changer for our business. At this point for 2016, as I said we will improve on 2015 and it will be much better, but we will provide more detailed guidance on our first quarter earnings call. I’d like to now turn the call over to Ben, who will go into more detail on the numbers and then I will be back to answer your questions at the conclusion of the formal remarks. Ben?

Thank you, Lou. I’ll begin with revenue. Our total revenue from continuing operations for the fourth quarter was $15.1 million compared to $17 million in the fourth quarter of 2014, a decrease of approximately $1.8 million or 10.8%. Our total revenue for the year ending December 31, 2015 increased by $5.3 million or 9.3%. Our Service segment increased revenue by $1.1 million compared to fourth quarter of 2014, but that was offset by a drop in our treatment revenue of $2.9 million. Our Service segment continued to show modest growth in the fourth quarter when compared with prior year and we continue to win our share of the smaller contract. For the year ended 2015, our Service segment increased by $6.3 million or 43% compared to 2014. Now this difference includes approximately $2 million of revenue in 2014 that our engineering group had which we sold in 2014. Excluding this loss, our Service segment actually increased by approximately $8.3 million or 66%. Our treatment revenue did decrease as I mentioned by $2.9 million or 23.5% in the fourth quarter and this was from reduced volume. The reduction was a result of as Lou mentioned the few delays and some pretty sizeable shipments which were only delayed and we are expecting them in the first half of 2016. For the entire year Treatment segment was down $1 million or 2.4% as again this impact of these shipment delays resulted in a shortfall against prior year. Turning to our cost of goods sold. Our total costs of sales for the fourth quarter were $11.2 million compared to $12.3 million for the same period last year. Our cost of sales from our Treatment segment decreased by $1.5 million, or 17.7% from the fourth quarter of 2014. Again lower revenue for the quarter resulted in the lower variable costs of approximately $1.1 million, but we also saw reduced fixed costs at our facilities of approximately $438,000. Our Service segment cost of sales increased by $440,000 or 11.5% most of this cost increase was related to the increased variable cost from higher revenues with very little increase in our fixed cost. Our cost of sales for 2015 was higher than the prior year by $2.9 million or 6.4% and variable cost increases in Service segments related to increased revenue offset the reduced cost that we saw from the Treatment segment which was - again was associated with lower revenue and lower fixed facility cost. Turning to gross profit. For the quarter our gross profit was $3.9 million or 25.7% of revenue compared to prior year $4.7 million or 27.6% of revenue. Our gross profit from the Service segment increased $676,000 as the increased project revenue and improved gross margins contributed to the improvement. In the Treatment segment gross profit was down $1.5 million due to the revenue shortfall that offset by improved revenue mix and lower facility costs. For the year, our gross profit improved by $2.4 million versus prior year as both segments improved compared to the prior year with Service segment improving by $2 million. Our G&A cost for the quarter were $2.3 million or 15.4% down from $3.1 million or 18% of revenue last year. Improvements related to bad debt recoveries were partially offset by higher bid related marketing and administrative expenses. For the 12 months ended December 31, 2015 our G&A costs were $11 million or 17.6% of revenue which was down about $1 million from the $12 million or 20.9% of revenue from prior year. Income from our continuing operations for the quarter was $259,000 compared to [$741,000] in the prior year. Increased spending on research and development of $427,000 made up most of this reduction with the majority of the increase related to our development stage medical business. Income from our continuing operations for the fiscal year 2015 improved over prior year by $3.1 million despite an increase in our research and development spending of $1.4 million again related to our R&D, our development stage medical business. Income applicable to common shareholders for the quarter was $97,000 compared to last year’s income of $875,000. For the year, the loss applicable to common shareholders was $1.1 million compared to a loss in the prior year of $1.2 million. And as we mentioned earlier, consolidating our results from our development stage medical segment was the main reason for the losses as the net income to our loss - the net impact to our loss from this segment was $1.2 million and $680,000 for 2015 and 2014 respectively. Our income per share for the quarter was $0.01 compared to the income per share of $0.08 last year. For the year, our loss per share was $0.09 compared to a loss per share of $0.11 in the prior year. Our adjusted EBITDA from continuing operations as defined in this morning’s press release for the quarter was $2.5 million consistent with last years $2.5 million in the fourth quarter of 2014. For the year, our adjusted EBITDA came in at $7 million compared to $3.7 million in 2014, an increase of 87.6%. Turning to our balance sheet, our total cash and cash equivalents decreased by $2.2 million. Our cash required by our discontinued operations and net cash used in our medical segment were the main reasons for this drop. Total current receivables were down $1.2 million primarily due to the impact of the delayed shipments in our Treatment segment in the fourth quarter. Other current assets increased approximately $1 million related to facility related prepaid expenses. Our current liabilities from continuing operations were down $3.6 million mostly due to our lower unearned revenue and waste backlog. Our backlog was $4.7 million at year end 2015 compared to $9.2 million at the end of 2014. Our current liabilities from discontinued ops decreased $1.6 million primarily from paying down payables related to our 2013 facility fire at our Georgia facility. Our total debt is at $10 million at year-end, our lender P&C bank making up $9 million of that debt. We also had working capital of $3.1 million at year-end up considerably from $372,000 at the end of 2014. And finally, I’ll give you some cash flow activity for the year. Our cash provided by continuing operations was $1.7 million. Our cash used by discontinued ops was $2.9 million. Cash used by investing activities was $492,000 consisting of capital spending of $623 million and reduced by proceeds from some small asset sales and escrow receipts from our 2014 sale of our engineering firm. Our cash used in financing was $490,000 consisting of debt payments of $3.8 million and offset by equity raised by our medical company of approximately $1 million and an increase in our revolver debt of $2.3 million. With that operator, I’ll now turn the call over to question.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from [Evan Greenberg from Legend Cap Funds]. Please go ahead.

Hey, how are you guys.

Hi Evan.

How are you doing?

Good. I wanted to know - and I was very happy with services number and I guess that’s a better harbinger of things to come and the volatility on the waste - on the actual waste numbers? Do you see that business continuing to strengthen and as part of the new agreements the services revenue is going to increase along with that also the gross net margins on the services side?

Yes. I’ll give you an overall view first, as we’ve continue to win a lot of smaller contracts or unannounceable contracts, and so that group continues to do well and is growing and we’ve got a fairly full pipeline right now in terms of the projects that we’re bidding on. So we expect to see continued strong growth in that group over the next year and with that comes improved margins.

With the unannounceable contracts and the announced contracts that you recently announcing us when, are you able to have visibility for this year and can you - why didn’t you put out a - you didn’t put out a forecast or baseline or approximate baseline even though you know certain things haven’t hit yet. It seems like you’ve got enough contracted volumes to say this 2016 is going to be your growth for the Company?

Well, I thought we did, said we see 2016 growing. To give actual numbers at this early stage and with the lumpiness of the waste side, we’d like to get into the first quarter at least [past] the first quarter and then be able to talk about the overall, because the waste side has such a dramatic impact on the profitability of the Company.

Sure.

Right now from standing orders, it looks very good for 2016.

Okay. We probably anticipate the growth rate to be better than 2015 is what I would expect. And then also just one last question having to do with Perma-Fix Medical and the progress it’s been made there. You have been putting a lot of money into Perma-Fix Medical. I guess your expectation is that going to continue for another year, so and when do we see the value appearing for those shareholders. And I have a lot going on there and we’ve discussed as well previously so.

We have a lot going on and it will continue to be a - basically a cash drain for at least year and half, two years. So that will - we continue to see that, but it will also be funded by itself.

Great, thanks a lot Lou.

Okay.

[Operator Instructions] And our next question comes from Sam Roboski from SER Asset Management. Please go head.

Yes. Good morning Lou.

Hi Sam.

I want to bring up this interesting development were Kurion was acquired by French Giant Veolia for a $350 million to $360 million valuation. I'd like you to address how your treatment and they're working on Fukushima. I'd like to address how your treatment differs from theirs, is there any patents that you have that may infringe on yours vice versa. And is it a value to setup a committee to explore any type of potential transaction with other companies based on this valuation where Perma-Fix in this area has such a low valuation?

Well, it’s been interesting couple of months in the industry, you’ve seen two very dramatic events. One has been Veolia making an offer for Kurion at about four or five times revenue. And basically Kurion has two things. One, is they have water treatment contracts at Fukushima where they have done very well basically using technology that is basically non-proprietary. And then they have a retrofication technology that has contributed very little to the revenue and then a service group that does basically spare this work. So and then the second has been EnergySolutions has made a tender offer for Waste Control Specialists, the other landfill in the industry at about a very similar valuation by $400 million and that’s probably 10 times their revenue. So you’re seeing valuations right now and you’re seeing the industry going through some very dramatic consolidation with some major players and we think that will continue and we think you will see valuations continuing to stay up there. So as we look at it we were - I think it’s going to be a very interesting time for the industry as we go through these consolidations. I think we are in a very good spot, we probably have some of the best assets in the industry in terms of value and I’ve said this over and over just we could take almost any one of our facilities and it would have a tremendous value in terms of replacement value and also in terms of the opportunities that are now - exist out there. So we are very excited about the industry and we think there is some great opportunity here. As far the committee that you mentioned you know our Board has the strategic committee that it’s constantly exploring what the best options are for the Company in terms of - from a strategic point of view.

I assume we haven’t had an offer and is it worthy to hire an investment banker to speed up the process based on the fact here is the significant interest now and to sort of get an appropriate valuation for Perma-Fix for this part of the business?

As I said the Board has a strategic committee and it has involved bankers over the last several years under several times and continued to look for ways to explore various options. That’s being going on fairly constantly, so through that strategic commitment.

Okay. Let me ask you something on the - you say that the deferred contract which - is that’s going to be in the first quarter, it’s March 22, the quarter ends March 31. How much the dollar amount that was deferred that’s going to be in this first quarter?

Ben, you want to…

Most of it is going to be received in April.

In April?

Yes, as we were kind of careful to make sure it was in the second half of the year or in the second quarter. We said, we received in 2016. So first quarter is going to be like because a lot of this stuff is all scheduled for April, but then it's going to get pretty aggressive in the second and third quarter.

Ben, are you able to quantify the amount of this deferral for the second quarter?

It was actually a few shipments in the - probably a handful of shipments all worth - I'll just say over a $1 million a shipment kind of thing, so it was pretty - it was kind of caved the last quarter a little bit on the treatment side.

What we've seen in the business, what is happening is that one DOEs budget has improved and probably I’ve said this in the past, but one of the effects of an improving budget is they go through a reprogramming process, which actually starts delaying things. But as we sit today, we have several sites that now are in - I guess you would say in trouble under their consent decrees because they have delayed shipments and they are backing up and so we expect a very good year this year, because of the requirements they have to - for the [indiscernible] to get their fee and for the Department of Energy to meet its goal. So what we see coming is pretty significant for the year.

Okay. Now the Navy contract is that have to be funded and when is that supposed to begin?

It’s already started and now it’s been funded and the money is there and we are starting to populate that as we speak.

So revenue is being hit in this March quarter or in the next quarter?

It’ll start probably in the middle of the year here we’ll actually recognize the revenue…

Thank you, Lou. Good luck.

Okay.

Our next question comes from Bill Chapman from Morgan Stanley. Please go ahead.

Guys, good morning.

Hey Bill.

Hey Bill.

Hello, I’ve come across several articles at Northwest Publications where there is a more and more uproar about the Hanford and delays on treating that high-level treatment. And you folks are talking about possibly getting some of that work back I presume when you mentioned high level treatment?

Well, our Hanford and our Richland facility is one of our main high activity facilities. It’s the facility that can take true waste and it’s the facility that has the licenses and permits to take fairly high activity materials. So we see great opportunities there at as you know I’ve always said at the Hanford operation there is a tremendous amount of waste there that needs treatment. We have the technologies were - talked about we can provide a alternative there and a supplement to the waste treatment plant that’s being built. And we are continuing to pursue those and I’m as optimistic as I’ve ever been that we could see some movement here in the very near future. I’d compare it to how it worked with true waste. And if you go back in our history and look at the announcements, we hardly ever said, we got a contract to treat true waste. What would really happen in those cases is it builds up - they give you a bottle then they give you truckloads and they give you trainloads. And during those periods it’s hard sometimes to even announce what’s going on that they occur very gradually and somewhat under the radar. So what I think might happen is very similar to what happened with the true waste. We one day started treating true waste and next thing you know today it’s one of our biggest revenue streams coming into our facility in Richland. So very optimistic we will continue to move in the higher activity materials and hopefully see some progress here in the very near future.

Okay.

Right now we see great opportunities at the Hanford site.

Okay. And is that clean at site now I know it’s a substantial amount of cleanup work, is this a project that would take years and years or decades to cleanup or just give me an idea of that situation has been?

Well, I guess I would just give you the latest forecast by DOE that they are not going to be able to start the vitrification plant till 2038. So you can imagine the opportunities that are there to provide some backup services. So right now you are looking at - yes, decades of work once you start.

Okay. Let me ask you on the Tech-99, you mentioned you are going to have expenses going on here and after two years, but you are talking to partners about starting to have them do more of the work is that taking that into account you still be sharing expenses, if you…

Well, remember how it works, it is that - it’s a freestanding subsidiary, but we own over 50% and we will continue to own over 50% through the near-future. And as long as we do that, we must consolidate their numbers which will always be losses. So that’s why we’ve tried to do the adjusted EBITDA so that you really can see through what our number is and how well our base business is doing, so that it takes that medical expense out of the number. So that’s why we’ve tried to do the adjusted EBITDA that gives everybody a better view.

Yes, okay.

…where we are going and how we are doing.

Okay. Are you still testing it out to complete the - whatever the requirement you have to come up with on filing the [indiscernible]?

Yes. Where the Company is today is it is much more in the collecting of data, stage for the FDA. We have verified the process, we are very comfortable that we have a process that produces quantities of Tech-99, and it could be used commercially. And so now it’s a case of going through the various steps to collect data that would be acceptable to the FDA under FDA standards. So it’s a process that’s somewhat I guess I’d call it boring, because you are basically doing very detailed tests for the kind of data the FDA needs. It’s hard to talk about exactly the kind of progress we are making. Everything is on track and we are moving forward.

Okay. One last question on developing a partnership with the company that’s in this business. Are you hoping to have some kind of arrangement let’s say this summer?

Well, it’s possible. We are talking to a variety of strategies right now and there is a lot of interest as I’ve said whether we can get to a partnership or not at this point I hope so and optimistic, but hard to guarantee at this point.

Okay. Well, thanks for an update. It’s frustrating. We are getting the cost is penalizing and theseare not getting any kind of valuation premium what you have there, so hopefully something to change on that partnership will probably be that factor?

Bill, we are optimistic with as it’s developing here that hopefully we will see a better valuation on the medical side, which will help Perma-Fix in the end. Right now, we think it’s totally unrealistic, but very illiquid market in Poland at the moment and that's one of our main focus is how to improve that liquidity.

Okay. Well, thank you very much guys.

Next question comes from [indiscernible]. Please go ahead.

I have two parts of my question. First, you've mentioned that you have the ability to treat the high-level waste. What is your capacity, you have capacity to handle what mainly your expectation and second of all with regard to the waste and for what percentage of that waste can you treat?

I’ll give you sort of my answer to that. Is that the waste treatment we could treat fairly significant volumes very quickly, we could probably - as we see it today pretty much take that you’ve got a 150 tanks of waste and they are all slightly different. As we looked at those tanks from an activity point of view and a constituent point of view, there is a large majority that we could take today pretty much. I won’t quite say as this, we would have to do some pre-treatment prior to taking them which would be not real difficult and but if you do that simple pre-treatment, I need to give you a number because it’s we could probably take 70% of the volume with almost no capital maybe $1 million or so just to beef up our radiation protection program or so. So there is a very significant amount of the waste we could take and treat with some fairly simply pre-treatment that’s commercially available before we come to our facility to - and that’s the kind of the thing we would see trying to demonstrate to DOE in the near future here.

I guess we’ve always had difficulty in understanding wider such as big urgency can do this and [indiscernible] urgency to treat it, but you got the facilities there, it would just seem like it’s such an easy thing to be able to get this up and running, what is done to disconnect, why haven’t this been able to get started?

Well, I think the disconnect has been - they’ve been very focused on a path forward which was the treatment plan and getting it up and running. Because of the problems with it and now pushing it out to such an extent I mean it has become I think just prudent to start looking at. Well, maybe there is some simpler ways we can treat some waste here and can make progress because they have leaking tanks sitting there that are - you can imagine what the state and the communities think of those tanks, the longer they sit and the issues surrounding them. So I think just from a prudence point of view and the way the plant is - start-up has been push so far out, because it’s added a lot of new pressure, we try to do something.

All right. And it sounds like you are doing some testing for DOE right now?

Well, I wouldn’t say we are not doing anything for DOE right now, but we’ve offered options to them that they are - so maybe that’s how the best put it. We hope we will be doing something for them in the very near feature, this is the way to put it.

All right. Thank you very much.

Okay.

Thank you. There are no further questions. I would like to turn the floor back over to management for any closing remarks.

Once again, I would like to thank everybody for participating in our fourth quarter call. We have another quarter under our belts and nearly doubled our adjusted EBITDA for the year. I can say confidently we’ve turned the corner. We are pursuing several large contracts in the Service segment, which we hope to announce in the near future and we see a number of growing opportunities within the Treatment segment. Very excited about our prospect for the medical subsidiary based on the interest we’ve received from the industry and now finalizing our plans for FDA and look forward to providing additional updates in the near future. I would like to thank you all for attending.

Thank you. This concludes today’s conference. Thank you for participation and you may disconnect your lines at this time.