Perma-Fix Environmental Services, Inc. (PESI) Q1 2018 Earnings Report, Transcript and Summary

Greetings, everyone, and welcome to the Perma-Fix Environmental First Quarter 2018 and Business Update Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Waldman with Crescendo Communications. Please go ahead.

Thank you. Good morning, everyone, and welcome to Perma-Fix Environmental Services first quarter conference call. On the call with us this morning are Mark Duff, CEO; Dr. Louis Centofanti, Executive Vice President of Strategic Initiatives; and Ben Naccarato, Chief Financial Officer. The company issued a press release this morning containing first quarter 2018 financial results, which is also posted on the company's website. Do 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 and include certain non-GAAP financial measures. 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 and 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 as well as this morning's press release. 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. In addition, today's discussion will include references to non-GAAP measures. Perma-Fix believes that such information provides an additional measurement and consistent historical comparison of its performance. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is available on today's news release on our - and on our website. I'd now like to turn the call over to Mark Duff. Please go ahead, Mark.

Thanks, David. I'm happy to report we achieved not only positive EBITDA but also positive income for the quarter. This reflects the success of our efforts to streamline operations, while broadening our market base and gross profit increased to $3.3 million versus $2.7 million for the first quarter of 2017. And gross margins increased by 480 basis points to 26.2%. Even though revenue was relatively flat over Q1 of 2017, our backlog was up at the end of the first quarter, which provides us good visibility heading into the second quarter and the balance of the year. First, from a macro perspective, we're encouraged by the improved budget within the Department of Energy, our primary client. The recently enacted budget provides $7.1 billion to DOE's environmental management activities, which is $706 million above the $6.4 million enacted for 2017. This is an important element due to the high-fixed expenses within environmental management. Significant funding increases normally translate to increase incremental DOE spending on nonlabor projects, such as waste treatment activities. But for this reason, we remain optimistic that Perma-Fix can realize increased opportunities for waste treatment growth in the latter half of 2018 as our clients will need to spend this money to ensure earned value and secure budgets - some of the budgets of 2019. We've also seen a pickup amongst our defense clients that are beginning to plan and implement remediation projects, which will provide an increase in nuclear services opportunities in the third quarter and fourth quarter and also providing waste treatment growth as well. Also within the Treatment segment, construction activities are continuing at our Gainesville facility to accept and treat radioactive containment at water and additional commercial waste treatings getting in late Q3 as well as expansion programs, and the house's waste processing markets geographically to include recent contract wins in the Atlanta Metro area for household has its waste removal and disposition. We're making progress with the installation of our GMO system that is being installed in our Perma-Fix Northwest facility through our partnership with Veolia nuclear solutions. Upon completion of construction, insulation starts up and testing, the GeoMelt Vitrification system will be used to treat waste drums containing sodium residual waste. This Vitrification capability will provide the capacity to treat nonbulk sodium waste that has otherwise represented a waste stream with no past disposition. Just like the partnership with Veolia will provide an attractive niche market for Perma-Fix to leverage our existing permitted facilities to deploy new technologies. The market for treatment reactive waste such as sodium, we estimate to exceed about $5 million here annually based on inventories that we know exist at various government facilities. We continue to look outside the U.S. as well and are seeing a number of new international opportunities that should contribute to our growth. Especially waste streams that are very difficult to treat. Once treated in our U.S.-based facilities, we will return the waste in a stable form for farm disposal in the countries of origin. We're currently bidding on initiatives in the U.K., United Kingdom, Mexico and Italy, with awards anticipated in the fourth quarter along with Canada, which we should begin shipping waste through our Northwest facility in the second quarter. Within the Services Segment, this is an active quarter for project bids, including 10 new proposal submittals, which may result in an increase in fuel projects this summer. It's taken a while to get the Services Segment back on track, especially with a number of projects being delayed. But I remain confident that we're on the right long-term trajectory, and our management team continues to focus on increasing our win rates. A few areas that we're highlighting are the continued growth in Canada, including our rheological remediation services as well as new opportunities in the oil and gas markets in Western Pennsylvania, Ohio and West Virginia. They have allowed us to acquire unique capabilities and growing demand for the management of natural occurring rheological material waste, also known as NORM waste. Within the NORM markets, we are completing several new partnerships with firms to expand our services within the region and to service more clients overall. We have several important procurements underway and are still winning awards, which should contribute to revenue to over Services Segment in the next few quarters and provided - and provide the stability in revenue we need to sustain our growth. We are heavily focused on the aligning with strategic companies to support the large Department of Energy operating contracts at the Oak Ridge facilities in Tennessee and Hanford, Washington as well, which are entering into the procurement processes within the next few quarters. Perma-Fix offers these larger firms a unique value to the teams in providing innovating waste management solutions through our fixed facilities that directly translate the cost savings within the project baseline budgets and schedules, as defined in their proposals. On one final note, let me briefly touch on the medical subsidiary where we continue to trim costs. In fact, our total expenses for the quarter were down substantially versus the same time last year. Not for any lack in enthusiasm, but rather we shifted the strategy to focus on international partnering strategy, which - where we can work with partners that are much better equipped to develop the medical product and advances through the appropriate regulatory bodies. Initially, we'll focus on our small markets in Europe and elsewhere, where the cost in regulatory hurdles is much lower. This also allows us to show proof of concept with minimal capital expenditures at the subsidiary level. This strategy will allow us to advance development of our processes without a need to raise new term capital at a subsidiary level, and if we were to allude Perma-Fix interest in the subsidiary. We're closely - we're working closely with our partners in Canada and Italy that have initiated - indicated a willingness to fund development and regulatory costs in their respective market. We can't provide a specific breakdown of the cost they've incurred, but suffice to say they're running test, developing generators and a host of other activities that give us confidence that they are committed to the process. Another advantage to this pathway is that we can advance the technology and accumulate additional data that will help us streamline the path of regulatory approval in the U.S. Once we hit certain milestones, these markets - within these markets, we can either pursue the U.S. market on our own, or on our own, we'll negotiate a partnership on much better terms. So to wrap up, our financials are improving. We're seeing strong improvements in waste received in backlog, we've trimmed our expenses, and we see opportunities on horizon that can - that could be quite significant and potentially transform the business when they materialize. Given our reduced overhead and scalable operations, we will believe further revenue growth has the potential to significantly enhance our profitability. On that note, I'll turn it over to Ben who will discuss the financial results in more detail. Ben?

Thank you, Mark. We began 2018 with relatively flat overall revenue in the first quarter, but we did see improvements over the prior year in our gross profit, our gross margin, net income and our cash flow from operations. Our total revenue from continuing operations for the first quarter was $12.7 million consistent with $12.7 million last year. Our Services Segment revenue increased by $1 million or 38%, but this was offset by a reduction in our Treatment Segment of $1.1 million or 11%. The decrease in the Treatment Segment was primarily due to the closure of our M&EC facility, which in prior year recognized revenue of $3.4 million. Our cost of sales was down to $9.3 million, which was down from the prior year cost of $10 million. The reduction in our depreciation expense made up most of this improvement as our as - as most of the assets at our M&EC facility were written off in the third quarter of 2017, accounting for a reduction of approximately $768,000. Our gross profit for the quarter increased from $2.7 million in Q1 of 2017 to $3.3 million this year in the first quarter, an increase of $602,000 or 22%. Our Services Segment gross profit was up $509,000, which was due to the increased revenue, and our Treatment Segment gross profit improved by $93,000. Our SG&A for the quarter was $2.8 million, which was down from $2.9 million last year, primarily as a result of lower payroll-related costs. We had income from continuing operations for the quarter of $253,000 compared to a loss of $675,000 last year, an improvement of $928,000. Along with this increase in our - along with the increase in our gross profit, we also saw reductions in our administrative spending, our research spending on our Medical segment and lower interest from our diminishing debt. We had income applicable to common shareholders of $136,000 compared to last year's net loss of $727,000. And we had earnings per share of $0.01 compared to a loss per share last year of $0.06. Our adjusted EBITDA from continuing operations for the quarter, as we defined in this morning's press release, was $789,000 compared to $835,000 last year. Turning to our balance sheet. Compared to 12/31, our balance - our cash balance at the end of the first quarter was $2.9 million, which was up from $1.1 million at year-end, reflecting improved collections of our receivables. We had a $3.2 million reduction in our receivables, which reflected our improvement in our annual DSO, which fell from 55 days down to 34 days. Our unearned revenue increased approximately $309,000, with our backlog of waste increasing slightly from $7.7 million, up $7.9 million at the end of this quarter, and comparatively, our backlog at the end of first quarter of 2017 was $5.9 million. Our current closure approval related to our M&EC facility was down $927,000, representing spending on the closure and having a net balance of $1.9 million at the end of the quarter. Our total debt at the end of the quarter was $3.6 million, due to our credit facility at PNC Bank. Finally, I'll summarize our cash flow activity in the first quarter. Our cash provided from continuing operations was $2.6 million. Our cash used by discontinued operations was $181,000. Our cash used for investing in continuing operations was $290,000, of which $248,000 was cap spending. And our cash used for financing was $304,000, which represents our monthly payments on our term loan. With that, operator, I'll now turn the call over to questions.

[Operator Instructions] Our first question comes from the line of Tristan Barr with MTB Asset. Please proceed with your question.

Hey, guys. I noticed on a government-tracking website that there were two new TBI awards of Perma-Fix. I assume that we can assume that these indicate the Phase II of the tank test is underway?

Yes, Tristan. The project is progressing, and those are - indeed have been awarded, which is allowing us to move forward to the next phase. Unfortunately, Tristan, we are - not at liberty to provide any details with regards to where that's going at this point other than the next phase of the project is progressing.

Our next question will be coming from the line of Bill Nasgovitz with Heartland Funds.

Hi, good morning, guys. Could you talk a little bit about - Mark, you mentioned international. What level of sales do you estimate that we'll be doing in Canada, for example? And what are - can you enlighten us a little bit more in terms of opportunities outside of Canada?

Yes, Canada, Bill, is largely probably more weighted on the services side of the house. We're increasing our staffing of - in Canada. We'll open up a new office outside Chalk River facility, and that's growing pretty well. We continue to have to see a lot of bidding opportunities in the Port Hope area as well as other areas in Canada. It is a little slower, I mean, like we are receiving some waste there, as I mentioned, in the second quarter. As far as the other one to go, particularly Italy, there's a large project we've been working on for quite some time. And the procurement process in Italy is very, very slow but the projects are quite large. And most of the projects are between $20 million and $50 million overall over a number of years, still the larger projects. And it takes a long time to get through the procurements because what they do is that they down select down to two companies and then down to one, and it just takes a long time to get processed. So we're just abating the announcement of the large Italian project by December. We have another waste stream out of Italy that will be quite large as well as we're speculating on value that we also expect to see this year, and we expect to see some waste in the U.K. in the next two quarters.

And we have never been in the U.K. before, is that something new?

No, we've received waste in U.K. We actually have an office over there with some staff, and we've been with contracts in the Newcastle area, service contracts for a long time and have done a lot of projects over there in the past as it has gotten small over the years. But like I said, we've had the waste; we'll treat them up at Northwest and then ship the residues back for disposal over there. So they don't have the robust treatment capabilities in Europe that we have here. So once you get through the import licensing and all that, it's very high value for us to be able to treated on. Unfortunately, transportation costs can be a little expensive. But when you've got the capability in U.K. or in Europe, it provides a lot of value to our clients being able to ship it here and ship it back in a much smaller quantity.

Again, just turning back to Canada then. So what level of sales do you anticipate will be running in that area this year?

Yes. This year it will probably be right around $2 million in annualize, and we anticipate it doubling by this time next year. And we're adding a couple of staff every month. And it seems very small, Bill, and really is overall in a scheme of things. What it does is put us in a position to win larger jobs and once you start building the capacity and then having the technical expertise and the relationships and the trust, then you're in a position to win larger projects in the $5 million to $10 million range. So that - it's really kind of a slow process. We anticipate given where Canada is in their cleanup cycle, which is arguably 10, 20 years behind the U.S. They are well funded, they're moving, they're making progress, and they have money set aside, significant dollars set aside for large remediation projects, both at Chalk River and at - in Port Hope that we see is very strategic for us.

And lastly, I missed the backlog number. What is the backlog today versus a year ago?

79 today, 59 a year ago.

Our next question comes from the line of [Joe Brown].

Congratulations on your profitability, your net profit. When - I was curious when was the last time that the company had a net profit? Do you remember historically?

So it was probably - while certainly we're fourth quarter, the last quarter was profit for a couple of reasons. Prior to that 2016 - fourth quarter of 2016. The last 2 quarters have been profitable. The last two fourth quarters, yes, yes.

Okay. And I wanted to ask you, it sounded like you said that you have about $3 million in cash. Is it something like that?

Yes, we closed the quarter at $2.9 million, yes.

Okay. And now I'd assume that this quarter given your backlogs and the fact that you were profitable last quarter, I assume you're going to be profitable, again, this year - I'm sorry, the second quarter. And - so it sounds like you're building up some cash. I'm just wondering what your priorities are. What would you be doing with that? Would you pay off debt? I mean, your debt isn't that much but still interest rates are going up. And I'm just curious what your priorities are. As you accumulate cash, what are your priorities in terms of how would you spend it? Or you just want to hang on to your cash?

Well, on the short-term, we have the liability that comes with the closure at the M&EC plant. And that's why we have a rather large current closure liability on the books. So in the short term, that's what we would do with the cash. After that, we've got a pretty low and manageable debt. So I don't think there's a high priority to necessarily pay that off. So investing - reinvesting in capital or revenue-generating projects would probably be the priority.

And which ones do you think would it be there - would get priorities as far as capital reinvestment or spending projects? Would it be expanding in Canada? Or which of those projects would get the priorities?

Joe, you may recall from the last quarter telecon, we talked about the construction projects are ongoing at each of our facilities.

That's right.

Yes, to answer your question that we will be looking to expand the construction at our Oak Ridge facility to deploy a couple of new technologies or at least additional technologies as well as we have several in mind for the Northwest facility, which will also expand our treatment capacity there as well. So both of those facilities have backlog of projects that we would fund with additional cash.

Our next question is coming from the line of Bill Nasgovitz of Heartland Funds.

Yes, Mark, outside of the tank potential opportunity, what are you most excited about in terms of growth and profitability for Perma-Fix?

I appreciate the question, Bill. I have to say that probably the most exciting opportunities we're seeing are on the large rebate of some of the DOE contracts. I think that Perma-Fix has done a great job in the last few quarters of identifying how our fixed facilities can benefit if the larger business team going after these large bids, as you know, in the billions of dollars over 5-year, kind of, periods. And the facilities we have are strategically located where these procurements are occurring within a bridge in Hanford. They offer a very significant value in commercial waste treatment as well as solving technical issues at the site that are in those procurement opportunities. So I think very, very strategically aligned with the scopes of working that are coming out. And I see us being able to provide very important roles on those teams in the next couple of quarters or so as far over the next thing behind TBI that, I think, really look like big market movers for us.

At this time, I will turn the floor back to Mark Duff for closing remarks.

Great, thank you. I'd like to thank everyone for participating in our first quarter conference call. As I mentioned earlier, waste receipts up, backlog continues to grow within the Treatment Segment. Our recent initiatives to increase efficiency at our treatment facilities coupled with reduced costs from closure at the M&EC facility resulted in an improvement in both gross profit and an increase in gross margin of more than 480 basis points. We generated $789,000 of adjusted EBITDA and achieved positive net income attributable to common shareholders. And we're excited about the prospects of import, including the improved federal budgets and new expansion opportunities at our treatment facilities and continue diversification of our waste streams. We look forward to updating you, again, next quarter. Thank you very much.

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