Perma-Fix Environmental Services, Inc. (PESI) Q4 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Perma-Fix Environmental Year End 2016 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. It is now my pleasure to introduce your host, Natalya Rudman with Crescendo Communications. Thank you, Ms. Rudman, you may begin.

Thank you, Bob. Good morning everyone and welcome to Perma-Fix Environmental Services' fourth quarter and year end 2016 conference call. On the call with us this morning are Dr. Lou Centofanti, CEO; Ben Naccarato, CFO; and Mark Duff, COO and Executive Vice President. The Company issued a press release this morning containing fourth quarter and year end 2016 financial results, which is also posted on the Company's Web site. 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 the 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 filings within the U.S. Securities 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, Natalya, and welcome everyone. I'd like to first hit on some high points and then we'll get into some detail. First there has been a very -- you know, one of the most macro events going on is a very dramatic shift we're seeing at Department of Energy. Many of you probably have seen the proposed budget they put up which is a significant increase, and probably one of the highest numbers we've seen for the environment program. Also both Secretary Perry and his team has -- we're hearing much more a focus on how commercial -- the commercial operations can help accelerate the whole program. So we're real excited there with the macro events that are going on at DoE. Then touch on the solid results in the fourth quarter and somewhat look ahead to the good results we're already seeing in the first quarter. Then Mark Duff will be touching on the pipeline that we're seeing for services, it's as rich as we've seen. And in fact, rather minor contract we just won in Canada but it's significant since our first prime contract. We've had several contracts working with primes but this is the first one where we primed. Then the other point in the quarter has been -- we're freeing up about $3.4 million of our bonding fund which will come back into the company as cash and will strengthen our balance sheet. It's been a very, very busy six months. Now let's get into the details. Like I said earlier, very pleased to report solid fourth quarter results, believe we're back on track with positive and improving cash flow. In fact we came in ahead of guidance with $1.9 million of adjusted EBITDA versus a forecast of about $1 million. These results are significant compared to what we saw in the first nine months of '16. As we have previously disclosed we saw large number of shipments throughout '16 that were delayed and unanticipated spending constraints of federal level leading upto the election. This was not unique to us as it was effective to our peers as well. Even though the budgets weren't reduced, work programs were put on hold until last elections. We expect waste shipments to maybe at least -- as we expected waste shipment to neatly picked up back after the election and we've resumed bidding on a wide range of services contracts and like I said Mark will provide some additional color on our service pipeline later in the call. Looking ahead, we expect '17 to be a strong year for our treatment segment, despite some whether related delays in the northwest, the inferred [ph] site was actually shutdown for over 20 days because of weather, the first quarter '17 will still be significantly approved from the first quarter of last year with positive EBITDA. We expect this trend to continue throughout the year, especially on the treatment side where we're presuming a variety of major initiatives and look forward to discussing them further as they materialize. Additionally and back to the Department of Energy, even though the budgets have not been finalized, we're very encouraged by The White House's proposed budget for the DoE's offered some environment management which oversees the remediation of the nuclear waste at various DoE sites around the country. The current budget proposed by The White House is for $6.5 billion, a very significant increase over the $5.2 [ph] billion last year and if approved, would -- I believe be one of the highest numbers we've seen on the cleanup program. Also with the new secretary and early comments out of the transition team, we have not only have focused on accelerating the cleanup but also involving the commercial sector to define solutions to the environment program and help accelerate that program. We believe these two combinations give us a major focus on accelerating the cleanup and obviously be a huge win for us. Turning to our P&L; we continue to carefully manage expenses in identified new areas for cost savings. As we discussed in the past we're in the track to complete the closure of our MNEC facility by January of '18 after which we believe we will see an estimated savings with somewhere between $4 million to $5 million for the year in fixed cost annually. Then as I said in the summary, we're also pleased to report we're close to replacing our bonding which secures our closure requirements at our northwest facility; and in doing that we should free up approximately $3.4 million of restricted cash from our finite risks fund. And our plans are to use these funds to pay down our revolver line of credit in the second quarter. With what I said, the restricted cash in our balance sheet which secures our closure requirements is an underappreciated asset and in the second quarter '17 we expect our balance sheet to still reflect approximately $18 million of restricted cash; and we'll provide more detail on this later in the call. If I was to say that between the growth and revenue improved liquidity and the strength of our balance sheet, we believe the company is positioned for a significant turnaround this year. We continue to believe the company is dramatically undervalued, both to tangible and intangible assets such as our permits [ph] which would be nearly impossible to duplicate. Lastly, I know it's taken longer than expected but we continue to work towards finalizing an agreement with a private investor to fund our medical subsidiary and hope to have an update in the near future. With that let me now turn the Mark Duff who recently joined us as Executive VP. Since joining the company Mark has done a terrific job building the sales pipeline, especially within the service segment and integrating the services and new treatment part of our business. Mark?

Great. Thanks, Lou. A short time since I've joined the company, we've accomplished a number of very important strategic initiatives. I believe we'll position us for growth in the months and years ahead. First we completed implementation of our new business development program to broaden our reach in the new markets and new clients for the nuclear services opportunities out there. We've seen a significant increase in procurements which pick clearly into our core competencies which resulted in the increased number of proposal to be developed that were -- have been developed and a potential awards to be realized in the second and third quarters of this year. Within the treatment segment, we developed a new strategic plan focused on expansion of our treatment capabilities to better align with the market as well. We began to implement the plan to address several new waste streams specifically in the fourth quarter of '17 that can increase our stability in waste received while increasing our overall market potential for waste treatment. We're pleased to report that the overall waste received increased through the fourth quarter of last year providing an improved backlog heading into January/February of this year. This provides us greater visibility and confidence in our ability to meet our production goals for the first quarter as well as subsequent quarters throughout the year. And finally, we're optimistic about '17, specifically regarding our ability to see significant year-over-year increases in both revenue and profits as we realize the results of our new strategies and expansions of our markets in both the waste treatment side, as well as the nuclear services side. That's all I have today. I'll now turn it over to Ben.

Okay, thank you, Mark. Beginning with revenue, our total revenue from continuing operations for the fourth quarter was $13.4 million compared to last year's fourth quarter of $15.1 million, a decrease of $1.7 million or 11.3%. The treatment segment was relatively consistent to prior year with revenue only modest down by $193,000 or 2% but our services segment was down $1.5 million or 26.8%. While our treatment shipments did show improvement from the earlier part of the year, the drop in services revenue was a result of the completion of a significant contract that concluded in the fourth quarter. For the year ended 2016 our revenue was $51.2 million, well below $62.4 million in 2015. We experienced delays in the first three quarters of 2016 primarily related to the shipments from our government customers in the treatment segment and that accounted for approximately 81% of our shortfall. On the cost of goods sold, our total cost of sales was $10 million in the fourth quarter compared to $11.2 million in the prior year, a reduction of $1.2 million or 10.7%. Our treatment segment cost of sales decreased $283,000, primarily from the lower variable cost related to lower revenue but offset by an increase in our facility cost -- fixed facility cost which were brought about by our decision to close our MNEC location as we accelerated certain depreciation of certain assets. Our cost of sales from the services segment were down $916,000 with variable expenses related to lower revenue accounting for $886,000 and the remainder of about $30,000 from lower expenses. Our gross profit was $3.4 million compared to $3.5 million -- $3.9 million in 2015. The shortfall of $468,000 was primarily volume related but was offset by an improved revenue mix. For the year ended 2016, gross profit is $7.1 million compared to $14.4 million in 2015; again the lower revenue resulting from the shipment delays in the treatment segment is the primary reason for the gross profit shortfall. Our total SG&A cost for the quarter were $2.6 million compared to $2.3 million last year, an increase of approximately $228,000. Higher legal expenses and the large bad debt recovery in 2015 was the main reason for this variance. Our income from continuing operations for the quarter before taxes was $317,000 compared to income of $677,000 last year. Our net income attributable to common shareholders for the quarter was $226,000 compared to last year's net income of $97,000. Our year-to-date losses from both continuing operations and attributable to common shareholders included impairment charges write-offs and a tax benefit related to the closure of our MNEC location which totaled approximately $7.5 million. Our total income per share for the quarter was $0.02 per share compared to income per share of $0.01 in prior year. Our adjusted EBITDA from continuing operations for the quarter is defined in this morning's press release was $1.9 million compared to $2.5 million last year. Looking forward at some balance sheet items compared to 2015 year end, our cash was down $1.4 million which was representative of the spending in our Perma-Fix medical subsidiary which we consolidate. Our accounts receivable and unbilled receivable collectively were down approximately $2.6 million due to improved collections and lower revenue in 2016. Our other current assets were down $1.6 million due to a write-off of $587,000 at MNEC and a reduction of various other prepaid and receivables. Our intangibles and other assets were down $9 million which was a result of our write-off of the permit at MNEC. Our waste backlog finished at $5.2 million which was up from $4.7 million in 2015. Our long-term liabilities were down $2.9 million as a result of reclassifying the majority of our closure liability at MNEC from long-term to current. Our current debt was $1.2 million which was down $1.3 million of 2015 reflecting the pay-off of the shareholder loan in August 2016, and our total debt excluding debt issuances costs at quarter end was $9 million and this is all due to our lender P&C Bank. I'll next summarize our cash flow; our cash provided by continuing operations was $1.1 million, and I do want to note that that -- because of the consolidation of our medical that does include $1.4 million of spending by our medical group. So our core operations actually generated more of that. Cash from discontinued ops -- used by discontinued ops was $959,000. Our cash used for investing in continuing operations was $499,000 of which $436,000 was for cap spending. Our cash provided by investing activities of discontinued operations was $84,000 and cash used for financing was $956,000. Finally I'm going to address our working capital. Our working capital at year end was at a deficit of $2.1 million and again this was the result of reclassifying most of our closure liability of $2.2 million at MNEC as current due to the projected closure date of January 2018. As Lou mentioned earlier, we've also initiated a change in our bonding mechanism at Perma-Fix Northwest facility which will enable us to free-up approximately $3.5 million from our fine out risk thinking fund as we await sign-off from one of the regulators we continue to classify these funds as long-term. With that operator, I'll now open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of [indiscernible]. Please proceed with your question.

Mark, you'd indicated you might be able to give a little bit more color on the pipeline. So if you can give anymore color, I'd be interested.

Sure, Robert. It's difficult to go into too much detail because of competitor issues but basically we have a number of bids we're putting together, large bids for the core engineers. We're waiting for some awards from other public energy relative to our core competencies which primarily is waste management and real logical services. As Lou mentioned, we were successful in our project in Canada, we have not officially signed the accounts, we've been notified of a war but we're in the final negotiations contract in Canada and that's for remediation job in Toronto. And right now Rob we have in our backlog our hotlist about 15 bids that were waiting to gear on specifically, and those cover pretty wide gamete [ph] of types of services, primarily government sector type of work. So this time last year I would say, I wasn't here this time last year but we are backlogged or proposed that we're outstanding -- we're probably only a few long [indiscernible]. So I'm very encouraged by the fact we've got 15 or so -- but we're waiting here on any day, we look forward and we're developing five or six procurements a week and so we're certainly increasing our opportunities on the services side.

You're getting that many bids in?

Yes. We're spending a lot of time getting our proposals, services, control center up and running. And I think that's one of the areas that we're just weren't that strong; a year ago it was having an organized and methodical approach to identifying procurements before they come out so we can position for them. Also getting on teams, we weren't -- we've been focused a lot on that so those are two things that we've done and focused very specifically on proposals and opportunities -- specifically aligned with waste management and rat services which are two core competencies -- two primary competencies.

Is this year compares to -- you didn't have an exact number, did you just say a couple just like two or three or I'm not sure I understood that?

Yes, a year ago -- again, I wasn't here a year ago Robert so I don't have any data in front of me but typically we care two or three opportunities on our bid lift at a time last year; I don't know if Lou can add any additional details to that but we certainly increased that by at least a dozen over last year's typical trailing proposal submissions.

And Bob, the number he gave was pretty close and I think it's important too to realize those bids -- there is competition as most of mars service work and like our waste treatments on it. And so you may get a win rate of 30% or maybe 30% on them because of the various competition that people might be getting and even on time.

That's a good point Bob. So I -- 34% is a good target.

Now I know you can't quantify this too much but anything you can give us on the size of these bids?

We typically don't track anything under about $500,000 and specific on this list and most of them are above that. So I would say between $500,000 and a $10 million range overall but they vary widely. Some of these are Q-type of bids where the government will put an impairment out and they will put a large number on it knowing that this is going to be past orders over certain number of years, those are very difficult to estimate because you don't know how much funding is going to go to them from year-to-year, which projects are going to get -- maybe to be awarded. So there -- it's difficult to put prices where our revenue on these things at this point. We will be putting together a press release in the next few weeks in identifying some of these once we're in a position to announce them. On commercial plans they don't want things to be announced, and some government clients don't either, so some might be generic but we're going to loft [ph] them and get a press release together after we get a couple of more in our signature bottle.

And you said you expected awards in a fairly near-term, I mean it's also been tough to predict how fast the government is going to act on stuff but you sounded fairly confident that we're going to see the significant number of these awarded in Q2?

Those are -- our anticipation is yes.

And you mentioned that the backlog is up significantly, I don't know if you care to quantify that at all but if you can -- I'd be interested. If you can -- you can't.

Yes, I guess I would say that as far as backlog is concerned, you know, we bill our clients at the moment of receipt of waste. In typical we have -- we build during processing as it's processed and then we build during this both and it's very interest between clients spending a little kind of treatment we're doing. So when you see -- when you -- inventory in at our treatment facilities of waste to be processed, I mean you've got a good backlog that will carry you for several months. So right now we've got a backlog that should keep us close to our plan for revenue generation at each of our facilities for the next several months. And that's -- yes, I can't give you exact numbers at this point but basically I end up to say that we're very close to plan for the next several months.

And Bob I can jump in, the backlog -- treatment backlog is the one that I mentioned both 5.7 compared to about 4.7 last year.

Great, thank you.

So that's a decent backlog to start to see receipts come in which we've seen a good receipt start for the year.

Great. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of [indiscernible] with MTB Asset Management. Please proceed with your question.

With a little bit surprise we haven't gotten an update or you didn't provide an update on the high level waste. So is there anything you can say about that?

No we're under fairly strict orders there not to discuss the program.

Okay. That was my only question. Thanks guys.

Thank you. Our next question comes from the line of Paul [ph] who is a private investor. Please proceed with your question.

My question was essentially the same as Tristan's [ph]. So…

Yes. Sorry about that.

Alright.

Thank you. [Operator Instructions] Our next question comes from of Bill Chadman [ph] who is a private investor. Please proceed with your question.

Guys I'm sorry if I've missed this, if you've covered this in the earlier part of your presentation but what is the cash balance on our sinking [ph] fund now after the cash release?

When we released it, it will be about $18 million.

Okay. Now the $20…

Say again?

I'm sorry, go ahead.

It's just going to just -- the restricted balance will be $18 million.

Okay. So the $20 is -- what our insurance premiums have gone up?

We will -- we'll have a bonding fee that's kind of the trade-off and it's a net number because we were incurring certain bond fee already. So it's probably about a $100,000 a year increase.

Okay. Well let me ask too when the funding round of Perma-Fix Medical Service, so our cash outlays will cease? Is that correct?

They've slowed down dramatically over the year as we moved forward over the year and as the -- when we complete the funding they will freeze, yes. It will be…

Okay. And we want to over long [ph] and then consolidate the expenses, you know?

Depending on whether -- that depends Bill on whether or not we're controlling or not but if it goes to plan we would be minority and we would -- yes, we would no longer consolidate.

Okay. Could you give an update briefly on what competition were there at like more strong in some of our limited competitors but what route -- could you give an update on that please?

Well, probably the big update of course is the Chalk River did close, and it's put further stress on the whole supply chain. Yes, you continue to see prices move up. The generator, the President suppliers are attempting to move out of using high level waste for targets and moving into a still weapons grade waste is 20% but it's much lower activity -- at much lower concentration than uranium. And that dramatically import -- again, dramatically increase the price of Tech 99 in the market and also put further strains on the supply chain. So as we've seen the supply chain is continuing to struggle, there is a enough in the system; you're seeing material come out of Australia, South Africa and other places which have made up for the loss of Chalk River but you can imagine moving a very short live [indiscernible] around the world it's put a lot of strain on the system and made it much more fragile. As for the competitors, North Star [ph] continues to progress within the FDA and probably sometime in the near future they may be approved. We think they are making some progress but it's been a long hard road for them. Other than that there is really not been a lot of changes in the market. We still see a very rich market if we can further develop our technology. We don't think it's hurting us that much by our delays here.

Okay, thank you.

Thank you. There are no further questions at this time. I'd like to turn the floor back to management for closing comments.

Thank you. Once again, I'd like to thank everyone for participating in our fourth quarter call. Our results in '16 were impacted by factor somewhat out of our control but thanks to the strength of our balance sheet and our ability to manage our expenses. We believe we effectively weathered the storm and now have positive momentum again. This is evident by the $1.9 million of adjusted EBITDA we've reported for the fourth quarter. Heading into '17 we anticipate growth in revenue and improved profitability. First quarter is looking good considering some of the harsh weather in the northwest where our lead facility is located. We expect to see positive EBITDA in the first quarter and a big improvement over last year. As I mentioned earlier, we see ahead very significant opportunities in both treatment and service segments. On the treatment side we continue to look forward to moving into variety of new waste streams which we discussed earlier, it represents fairly sizeable opportunities. On the service side, as Mark discussed, we're bidding in some very large contracts and look forward to providing additional updates in the future. Taken account the high fixed cost nature of the business and the steps we've taken to drive top line growth from managing expenses, we expect to report -- dramatically improve profitability in '17. As I mentioned earlier, we see a much better macro environment as illustrated by the changes at Department of Energy and The White House is focused on accelerating the cleanup of legacy waste and improved funding for nuclear in general. We appreciate everyone's continued support and look forward to providing additional updates in the near future. Thank you all.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.