Perma-Fix Environmental Services, Inc. (PESI) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Perma-Fix Environmental Third Quarter 2018 and Business Update 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'd now like to turn the conference over to your host, David Waldman, Investor Relations for Perma-Fix. Thank you, you may begin.

Thank you. Good morning, everyone, and welcome to Perma-Fix Environmental Services Third Quarter Conference Call. On the call with us this morning are Mark Duff, President and 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 third quarter 2018 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 Investor Relations 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 and include certain non-GAAP financial measures. All statements on this conference call other than a statement 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 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 in today's news release on our website. I'd now like to turn the call over to Mark Duff. Please go ahead, Mark.

All right, thanks, David. I'm pleased to report that for the third straight quarter this year, we achieved revenue growth and profitability, despite continued an unexpected delays directly related to the closure of our M&EC facility. We now expect this facility to be closed on or before the end of the year, resulting in a positive impact on performance of the overall company. Despite this temporary disruption associated with the closure of M&EC as we shipped resources among our facilities, revenue for the third quarter of 2018 increased to $12 million versus $11.8 million for the same period last year. It's important to note, we have maintained the revenue over the last year despite terminating operations at M&EC, along with the termination of the treatment capabilities that were unique to that facility. Those capabilities have not yet been fully deployed within our other existing plants. M&EC generated about $5.6 million revenue in the first nine months of 2017 compared to $155,000 in '18. In other words, our three plants -- our three existing plants covered the drop in revenue. Our gross profit included $1.1 million and $550,000 of closure cost related to M&EC facility for the third quarter of 2018 and '17, respectively. Including these expenses -- excuse me, excluding these expenses, gross profit would have increased to $2.9 million versus $2.3 million for the third quarter of '17. We achieved adjusted EBITDA of $510,000 compared to $654,000 for the same period in '17, and we generated net income attributed to shareholders of $221,000 or $0.02 per share versus a loss of $2 million or a loss of $0.17 per share for the same period last year. The transition issues related to our M&EC facility are largely behind us with closure activities expected to be ramping down and regulatory approvals expected by the end of the year. While we would have liked to have M&EC close months ago, our team has worked very hard to ensure the impacts to Perma-Fix performance is minimized until the transition activities are completed. We also see the impact of our new sales strategies and increased focus on delivering innovative solutions to our clients, as a result, we expect significant potential moving forward. Turning first to our Treatment segment. We entered the fourth quarter, beginning in October, with a backlog in excess of $9 million, which should have bode well for the rest of the year and into the first quarter of '19. Also within Treatment segment, construction activities are continuing at our Perma-Fix explore facility to accept and treat radioactively contaminated water and additional commercial waste streams, while we've realized some challenges in achieving operational status, due to long delays in permit approvals, we've already begun to receive water treatment backlog inventories to support operation and should begin treatment in the first quarter of 2019. We're also continuing our expansion program in the hazardous waste processing market, are primarily targeting geographically focused opportunities in the Southeast U.S. markets in order to maximize utilization and throughput of our facilities. We've realized recent wins in both Georgia and Florida, including large metropolitan areas, are providing sustainable backlog for larger volumes of hazardous waste. We're also making progress with installation of our GeoMelt system at our Perma-Fix Northwest facility through a partnership with Veolia Nuclear Solutions. We have completed construction, installation, and we've initiated startup testing of the GeoMelt Vitrification system, which we use to treat waste drums containing sodium residual waste. The completion of this capability is critical to Perma-Fix and the federal government as well, as it will allow us to address a large inventory of reactive waste currently in storage. We continue to pursue a number of international opportunities with strong probabilities for success. However, as the nature of most international opportunities the projects have more administrative issues to overcome and are generally considered middle to longer term in nature. Within the Services segment, revenue increased to $2.9 million or 19.9% for the third quarter of 2018. The quarter realized increases in bidding activities particularly within the U.S. Army Corps of Engineers, which has increased funding for their military base upgrades. We have initiated several smaller projects based on recent wins that will run through the summer and providing sustainable revenue as well as new and much-needed references for new and future DoD projects. We believe we're well positioned to support the large U.S. DOE, Department of Energy, opportunities currently in the procurement process for the three major sites, which are ongoing over the next 18 months, leveraging our demonstrated inventory technologies at our three facilities allows us to reduce on-site waste processing, provides risk reduction within DOE's facilities and it also integrates the ability to accelerate their baseline schedules without increasing cost of the project. We're also expanding our role in the oil and gas markets in Pennsylvania, Ohio and West Virginia for the treatment of naturally occurring radiological material waste, also known as NORM waste, which can be difficult waste stream for oil and gas producers and is a significant by-product of fracking. We have a new analytical lab in West Virginia. It's in the heart of the Marcellus Shale region, providing 24-hour analysis for the industry has significantly reduced cost over traditional laboratory. That lab, which is now certified by the State of West Virginia, allows the driller to quickly and more efficiently determine [indiscernible] for waste generation during operations. Finally, as discussed last quarter, we have virtually eliminated cost within our Medical subsidiary and are focused on a partnering strategy. We'll further discuss the updates at appropriate time. And so to wrap up, Perma-Fix is positioned to complete 2018 with a strong funded backlog and opportunity for sustainable growth through 2019. Our sales pipeline is strong, and we continue to identify opportunities for bidding that align with our core competencies. As a result of our facility upgrades and technology deployments, we are very well positioned to support large procurements within the DOE market as well as providing continued support to the test-bed initiative at Hanford, all providing the potential for significant positive impacts on revenue over the next several years. Importantly, several of our projects are working on -- and could be quite significant and potentially transform our business when they are materialized. On that note, I'll turn the call over to Ben, who will discuss the financial results in more detail. Ben?

Thank you, Mark. Starting with our revenue. Our total revenue from continuing operations for the third quarter was relatively flat at $12 million compared to $11.8 million in the third quarter of prior year. Our Service segment revenue increased by $478,000 or 19.9%, which was offset by a reduction in our Treatment segment of $252,000 or 2.7%. Our Service segment produced higher project-based revenue due to the increased scope in our current projects. Our Treatment segment did see an increase in revenue, as Mark mentioned, at our three other operating plants but this increase was offset by a drop in revenue at M&EC year-over-year, which recognized $578,000 of revenue in 2017 and only $23,000 in 2018. For nine months ending September 30, our total revenue was $37.8 million compared to $37.2 million in the prior year. As with the quarter, our Services revenue exceeded prior year, while our Treatment segment was lower than prior year, due to the reduction in revenue at M&EC from the closure. Similar to our revenue, our cost of sales were relatively flat at $10.2 million compared to prior year cost of $10 million. In this quarter, we booked an additional $1.1 million of reserve related to the M&EC closure and that compares to $550,000 in the third quarter of 2017. Our gross profit for the quarter increased slightly by -- to $1.8 million compared to $1.7 million in Q3 of 2017 and the impact of the $1.1 million reserve for the M&EC closure negatively impacted this gross profit. Excluding this reserve in Q3 of this year and the reserve we booked last year, gross profit would have been increased by approximately $623,000. Year-to-date our gross profit was $7.2 million compared to $6.8 million last year. Again, this gross profit includes increased closure reserves at M&EC in both 2018 and 2017 of $2.3 million and $550,000, respectively. And when we exclude -- when excluded this reflects an improvement in our gross profit of approximately $2.1 million on comparable revenue. Our G&A cost for the quarter were $2.6 million, which is consistent with prior year, as we had reductions in consulting and property rental expenses, which were offset by higher labor costs in our sales and marketing. For the nine months ended September 30 of '18, SG&A cost dropped by approximately $276,000 due to lower labor consulting and property rental costs. We had a loss from continuing operations net of taxes of $1 million in the quarter compared to a loss of $1.9 million last year. M&EC related closure expenses for this quarter were $1.1 million as mentioned and they were $1.2 million in Q3 of '17, excluding these expenses would have produced an operating income from continuing operations of $58,000 compared to a loss of $651,000 in 2017. In the third quarter of '18, the company booked a tax benefit of approximately $1.4 million relating to tax losses in the NOL valuation resulting from the closure of the M&EC plant. We had a net income attributable to common shareholders of $221,000 compared to last year's net loss of $2 million. For the nine months, our net income attributable to common shareholders was $965,000 compared to a loss of $3.9 million in the prior year, an improvement of $4.9 million. We had net income per share for the quarter of $0.02 compared to a loss per share of $0.17 in the prior year. And for nine months, our net income per share is at $0.08 compared to a loss per share of $0.34 last year. Our adjusted EBITDA from continuing operations for the quarter, as we defined in this morning's press release, was $510,000 compared to $654,000 last year. Turning to our balance sheet. As compared to the December 31, 2017, our cash balance at the end of the quarter was $793,000, down from $1.1 million at year-end, reflecting the spending on the closure activities at M&EC. Collectively, our accounts receivable and current unbilled receivables dropped approximately $800,000, reflecting our improved collection and billing efforts. Our current liabilities were up $617,000, reflecting increase in the closure reserve at M&EC. Our backlog at the end of the quarter was $9.4 million compared to $7.7 million at year-end and up comparatively from $6.8 million in September of '17. Our current closure reserve related to M&EC facility was approximately $1 million. Our total debt at the end of the quarter was $4.4 million, net of debt issuance cost, most of which is owed to our primary lender, PNC Bank. Finally, I'll summarize our year-to-date cash flow activity at the end of the third quarter. Cash provided by continuing operations is $1 million. Our cash use by discontinued operations $468,000. Cash used in investing activities of continuing operations was $1.1 million. Cash provided by investing activities of discontinued operations is $54,000 and cash provided by financing was $384,000, representing, primarily, our monthly payments to the term loan of $915,000 and borrowing on our revolving line of credit of $1.2 million. With that, operator, we can open the call for questions.

[Operator Instructions] Our first question here is from Bill Nasgovitz from Heartland Funds.

You mentioned transformational contracts. Can you elaborate a little bit in terms of what -- is it Treatment, Services, both and just perhaps give us some color on that?

Sure, Bill. Basically, what we mean by transformational contracts are ones that are significant enough that would dramatically change the company and those, as we've talked about in the past, are a little bit farther out, some of those would include the large DOE contracts that are in the process -- in the procurement process where we'd be on teams -- we'd be a junior member on teams with the larger companies and those would be transformative. The test-bed initiative will be transformative and once we get some of these -- all of our -- or I'd say all of our transition over with M&EC, and our new construction complete, that would be transformative as well. So basically, Bill, definition of transformative is an impact to the company that would potentially be significant.

I might have missed this, so M&EC that facility is finally closed this quarter? Fourth quarter?

It's not finally closed. We're about 95% done, cleaning it out. Bill, particularly we have to remove contamination from the floors, and we've had a lot of problems, and we keep finding more and more. We know where all of it is now, we've got some new technology deployed this week in there too, this is what we call scabbling. That's basically taking about 0.5 inch off the concrete floors and the -- then once we've done that then we'll do a final survey and verify that it's clean and the regulators will approve that, and we'll be out. So we're hoping to have all that done by the end of the third -- excuse me, end of the fourth quarter, this quarter.

There are no further questions. I'd like to turn the floor back over to management for any closing comments.

All right, thank you. I'd like to thank everyone for participating in the third quarter conference call. As I mentioned earlier, we achieved solid growth and profitability. Our backlog is up. We've increased bidding activities in our Services segment, and we're working on several large projects within the Treatment segment that can be transformative, as we discussed. And we look forward to updating you again next quarter. Thank you.

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