Perma-Fix Environmental Services, Inc. (PESI) Q1 2019 Earnings Report, Transcript and Summary

Greeting and welcome to the Perma-Fix Environmental First Quarter 2019 Business Update Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, David Waldman, Investor Relations. Please go ahead.

Thank you, Hector. Good morning, everyone, and welcome to Perma-Fix Environmental Services' First Quarter 2019 Conference Call. On the call with us this morning are Mark Duff, President and CEO; Dr. Lou Centofanti, Executive Vice President of Strategic Initiatives; and Ben Naccarato, Chief Financial Officer. The company issued a press release this morning containing first quarter 2019 financial results, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at 212-671-1020. I'd also like to remind everyone that certain statements contained within this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and include certain non-GAAP financial measures. All statements on this conference call, other than statements of historical fact, are forward-looking statements that are subject to known and unknown risks, uncertainties and other factors, which could cause actual results and performance of the company to differ materially from such statements. These risks and uncertainties are detailed in the company's filings with the U.S. Securities and Exchange Commission 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.

Great. Thanks, David. The first quarter sales induced several factors, but overall, we're very well-positioned heading into the second quarter and the balance of this year. Starting with our Treatment Segment, revenue increased to $9.9 million for the first quarter compared to $9 million for the same period last year. We achieved these results despite roughly 3 weeks of very cold weather and shipment-related delays at our Northwest facility as well as delayed in permit approvals due to the government shutdown around the first of the year. These issues are behind us heading in the second quarter, and our backlog stood at approximately $9.9 million as of March 31, 2019. As a result, we're very encouraged with the outlook for our Treatment Segment. We've also concluded the cleanup at the M&EC facility and are working to complete the final verification surveys. While we're disappointed with how long this process has taken, we're now conducting the final verification process and working directly with the landlord in the state of Tennessee for release of the permit. We still expect this to happen later this quarter. As announced on our fourth quarter call a couple of weeks ago, we have completed testing and demonstration of the GeoMelt vitrification unit at our Perma-Fix Northwest facility and have now formally commenced commercial operations of the GeoMelt unit for a partnership with Veolia Nuclear Solutions. This new capability allows us to address a large inventory of reactive waste currently in storage and provides us a substantial multiyear backlog from a new and incremental waste stream. The government inventory of this waste stream is in excess of $100 million. The construction activities are continuing at our Perma-Fix Florida facility to accept and treat radioactively contaminated water and additional commercial waste streams as well. We've begun to receive water treatment backlog inventories now and remain on track to commence our operations through the summer. We also recently announced successful testing of our new patented and cost-effective in-ground separation technology for mercury-contaminated soils. As a passive system, this process differs from current separation technology that requires soil removal and on-site or off-site treatment. The new system operates in-ground by drawing the elemental mercury to a centralized collection point, at which time the mercury can easily be and cost-effectively be extracted from the ground. As a result, the passive system has a potential to significantly lower lifecycle remediation and treatment costs. Based on some of the near-term objectives within Department of Energy, mercury remediation technologies will play a key role in providing a comprehensive solution to be represented in several procurements over the next few years. Turning to the Treatment Segment -- excuse me, turning to the Services Segment. We experienced temporary weakness in Q1 due to the timing of projects. However, as previously announced, we've been awarded several substantial new projects all commencing in the second quarter of 2019. Each of these projects have now been signed, transitions have been successful and we are progressing on schedule. In fact, a few of these are actually growing. We estimate the collective value of these contracts to be approximately $17 million through 2019 alone. These contracts have significant potential for growth in the future years as well. Now these wins include remediation work in Canada as well as several Department of Energy locations throughout the U.S. We believe these awards are a direct result of the improvements we made last year within our business development organization. As a result, we're also bidding on a number of other additional large contracts and look forward to providing future updates in the next few quarters on those. So to wrap up, we're about two years into our strategic plan for growth. And while progress has been slower than anticipated, we remain optimistic about our future with the changes we made to become more efficient and the investments we've made to support growth. These changes, beginning with the M&EC closure, have included expansion of treatment capabilities, enhancement of our marketing and sales programs and broadening our market base with waste received. Each of these initiatives have begun to support several increased -- excuse me, to support revenue increases and subsequent margin growth that will strengthen our 2019 profitability. As an example, we're starting to see the benefit of improvements we made last year through our business development organization as illustrated by the over $17 million contracts awarded in March alone. We are actively bidding on a number of additional large projects within both segments and look forward to providing further updates as these developments unfold on these procurements. On that note, I'll turn the call over to Ben who will discuss the financial results in more detail. Ben?

Thanks, Mark. Starting with revenue. Our total revenue from continuing operation for the quarter -- first quarter was $11.7 million compared to prior year of $12.7 million. The Treatment Segment revenue increased by $946,000 or 10.6% but was offset by the reduction in our Services Segment of $1.9 million. Winter conditions, as Mark noted, at our Northwest facility impacted the volume of incoming waste, but the positive pricing and beginning backlog, that provided for increased revenue in the segment. Our Services Segment was down due to minimal activity in our largest contracts as we awaited the award of next phase, which was received in late March and began in April. The cost of sales was $9.2 million, down slightly from prior year cost of $9.3 million. Variable operating costs were down $723,000 due to the improved mix of treatment waste versus service revenue. This increase though was offset by higher fixed costs related to payroll expense and closure costs. Our gross profit for the quarter decreased by $3.3 million in Q1 -- from $3.3 million in Q1 of '18 to $2.5 million in Q1 of '19, a decrease of $820,000 or 24.7%. Our Treatment Segment gross profit was up $177,000 due to the increased revenue, while our Services Segment gross profit dropped by $997,000 due to the lower project revenue. Our SG&A costs for the quarter were $2.9 million, up slightly from $2.8 million last year, and primarily the result of higher bid and proposal expenses and increased payroll. Our loss from continuing operations net of taxes for the quarter was $550,000 compared to income of $253,000 last year. We had a net loss attributable to common shareholders of $672,000 compared to last year's net income of $136,000. We had net loss per share for the quarter of $0.06 compared to net income per share of $0.01 in the prior year. Our adjusted EBITDA from continuing operations, as we defined in this morning's press release, was $67,000 compared to $789,000 last year. Turning to our balance sheet. As compared to 12/31/18, our cash balance at the end of the year was $345,000, down from $812,000 at year-end. The remainder of our current assets were fairly consistent with year-end. We do have an operating right use of assets now on the books totaling $2.6 million, which represents the present value of our operating leases as a result of implementing the new lease accounting guidelines, ASC 842. Our current liabilities also were relatively flat, including our unearned revenue which decreased approximately $1.2 million. Our backlog of waste at the end of the quarter was approximately $9.9 million, which is down from $11.1 million at year-end, but up from $7.9 million at the end of the first quarter of '18. Our total debt at the end of the quarter was $3.4 million, which is primarily owed to our credit facility, PNC Bank. And finally, I'll update on a few cash flow numbers. Cash used by our continuing operations was $147,000. Cash used by discontinued operation was $182,000. Cash used for investing in continuing operations was $223,000. Cash provided for investing of discontinued operations was $25,000. And cash provided for financing was $137,000, which is made up of our monthly payments to the term loan of $304,000, net proceeds from the revolver of $365,000 and other lease financing of $76,000. With that, I'll now turn the call over to questions.

[Operator Instructions]. Our first question comes from the line of Anthony Marchese [ph], Private Investor.

A question regarding -- can you give us any update on -- or do you like to say anything that's publicly available on your work with the DOE?

Well, probably about...

With the vitrification, yes.

I'm sorry?

Yes, yes. With the -- I'm sorry, with the technology you have for the DOE, that's what I meant.

Yes. Right now, about 60% of our revenue is through the Department of Energy. We have a lot of different technologies. Are you speaking about the Hanford specifically?

Yes, yes.

Yes. The TBI -- what we call TBI, which is the test bed initiative, is ongoing and they're making great progress. Most of the emphasis on TBI right now is on the in-tank extraction unit. And that system, the process and associated permitting for that, DOE and the other part of the team is managing. And that's on track. In fact, there's -- I think it's out for public comment now, out of Hanford in regards to that system. So to answer your question, things are moving forward. We're still anticipating receipt -- to begin receipt of that TBI waste, which is 2,000 gallons in the fourth quarter this year.

Our next question comes from the line of Steven Fine [ph], Private Investor.

I got a bunch of questions. One, let me understand the sales. So you're telling me -- you're saying you did $11.7 million in the first quarter, you have a backlog of $10 million in Treatment and then you have $17 million which you have signed in Service. So that's roughly about $38 million on May 10 when you did $50 million last year. Now is that correct?

Those numbers -- yes, those numbers are correct.

So if we prorate this and this, say, keeps going this way, you're way ahead of last year?

Absolutely. Strictly in regard to revenue, we're ahead -- significantly ahead of last year. With that $17 million particularly, that is all 2019 spend, we're significantly ahead last year in revenue.

So do you have a safe projection, I mean like $60 million, $70 million? I mean you got to be exceeding the way you're going right now. And then with all of -- aside from the TBI, I mean, do you have any -- let's say, what I used to project, they used to go high, low and average. So is there an average expectation?

Steve, I'm moralized to do that because this business, you project the Services business based with funded backlog. Like these new contracts we have, we can clearly say we have $17 million of funded backlog for this year. Projects are also running, they're funded, they're rolling. But what's difficult in this business is on the waste treatment side. And because even though we have $10 million in backlog, when we say that, basically, we have $10 million in inventory that we have contracts where we funded and we paid for in some cases. But it's really dependent on a lot of things to continue the receipts through the year. So in other words, you don't have -- even though we're doing great compared to last year, where we're sitting right now, a lot of things can happen. So I'm very hesitant to say that we're going to be dramatically higher overall than last year. But I would certainly anticipate a growth between 10% and 20% even if we just stayed on current path for -- in regards for revenue for the year that we're heading on right now. We have a lot of outstanding bids, Steve, as we always do, but we've been doing better on them. And we're in a position now, with a couple more of those bids coming through successfully, we're in a position for real growth. And hopefully, we can start realizing those wins and coming out on top of those wins in the next couple of quarters.

Yes. I didn't realize that the $17 million was totally in Service, the contract that you were signing on March.

Yes, it was all Service.

Yes. Well, that's wonderful. One question. When you say that as of the end of March, you had $10 million in Treatment backlog, how much of that represents the GeoMelt?

Probably -- the GeoMelt inventory we have right now will go a couple of years. So I would probably estimate that to be, for the rest of this fiscal year, between $1 million and $2 million.

Just $1 million and $2 million?

$1 million or $2 million, yes. It's just what we have in backlog right now for that. Correct.

And that -- so all you're going to do in GeoMelt this year will be $1 million to $2 million?

That's this year, yes. And the reason is even though we have a good backlog of that, we're still in a treatability study mode. So while we're fully operational, it's not going as fast as we'd like, but it is going as fast as it's operationally designed right now.

And that's only one area. No, I mean when you look at everything -- all right. With regard to the closing down of the plant, I'm so much confused on this. So I understand you made an accounting adjustment for the $5 million sinking fund you'll get when you're done. But when you're done, you're actually going to get it -- are you actually going to get an influx of $5 million?

Yes. Yes, Steve, we have about $16 million that is of cash that collateralizes our closure at all of our plants. It supports the insurance policy in the event of any closure requirement. When that plant is closed, our closure requirements at that plant alone are going to go down ballpark $11 million or $12 million of financial assurance requirement. And because of that, the company AIG that holds that collateral is releasing $5 million of cash. So that is...

And you know what -- yes, I'm sorry.

Yes. And that's on our balance sheet. It's classified right now under finite risk as a long-term asset because, generally, it's not liquid unless it's converting out. So that is expected in this quarter.

So it's bigger then, but you will just transfer it, it will go from one thing to cash?

I'm sorry. Say again?

So is that -- so is the five -- can you hear me? I have earplugs on.

Yes, yes.

So is the $5 million included in EBITDA now? Or will it...

It will not be included in EBITDA. It's just a shift from a long-term asset to the cash. Where you'll see the improvement is in the working capital number. You'll see...

Right. But it's integrated in the EBITDA right now?

Correct. Well, it's not really -- it's not an income. It's cash that we've basically put aside. It's almost like an asset. So you will not see an EBITDA impact from this, an earnings impact. You'll just see liquidity improvement.

Well, so you'll have -- but you'll have physical cash?

Correct, correct.

Okay. When is Medical going away, period? I mean in the last quarter, you said you wrote off a lot of stuff because of some assumptions, but I noticed there was still a number there. So when are there going to be a total -- you did state this in May that this project -- the Medical project is being done by other people. So when are we not going to see any write-off to well assist the Medical?

Medical is still -- we'll still be incurring some expenses in Medical over time, and it's constantly being reviewed. But with our present plan of -- where our partners are funding most of the work. So at this point, we're -- you will still see over the short term some expenses.

And Steve, while that analysis is ongoing, the net cash output from that segment right now is about $10,000 a month. So there's pretty minimal spending. It's just maintenance. It's being a public company. There are certain accounting, audit and legal costs we have to incur. But otherwise, everything is being done in these arrangements that we've set up with these foreign countries where they're doing all of the research and development for nothing.

When you made the statement, Mark -- when Mark made the statement that because of the bad weather, permit approvals were impacted. Can you address that?

Yes. We had a lot of exemptions in transportation-related permits for some of our unique waste shipments. And they go through DOT and through the regulatory community. And those were impacted by the government shutdown, and so they were delayed a couple of months. So it is back, everything up through the year, but this is now starting to get -- loosened back up back to normal.

All right. The new technology that you're talking about with regards to mercury, when will that be commercialized? And what is the -- do you have any sense of the potential for that sales-wise?

It's difficult to find potential at this point. But because it's unknown with all -- where all the opportunities are and how this will apply to all of them, the value that we bring on the table on this is on upcoming procurements that are in the near term, in other words, 1 or 2 years, where we know there is mercury remediation in the soil that's required. And this is a unique, cost-effective and very inexpensive approach to remediation of the soils that can pull that mercury out. So again, it's difficult to answer your question, Steve, because until we see the procurement, until we see what the objectives are, define applications, we're in the early side of that and we'll start seeing that develop here with Oak Ridge first in the next year or so.

So in other words, you go in, you develop technology and you don't know the size of the market? I'm not being sarcastic. I mean I'm presuming you have some sense of the size of the market when you go develop something.

Yes, we do. What we understand -- yes, it's just difficult to put a number on it because we're not sure of the extent that this technology will apply -- I don't know what the word is, if there's mercury across the entire site, it's not going to work for the entire site. It's hard to say how much it apply. And we're just not in a position at this point, based on the fact there's procurements going on and coming up, to put a number on it.

Well, it's still -- I mean that's still -- I consider myself a reasonably technical person, and it just amazes me how you guys constantly develop these new things and so forth. All right. So my favorite subject. So when are you going to be awarded the tank closure contract?

Well, I'm pretty sensitive to talk about this procurement, Steve. But right now, the award is scheduled by Department of Energy to be announced in early July or early in the third quarter, and transition will begin in August. So we don't know anything between now and then, but that's their current schedule.

So with regard to -- in the last call, you mentioned that there was a verbal presentation. Has that -- the oral presentation, has that been completed?

That's been completed. That was completed in April, and so now we wait.

I see. So is there -- presuming you're in play here, are there other -- do you go back in and have to explain your stuff? I mean, is it an ongoing process? Or is it now just awaiting for the decision?

Right now, it's pretty much awaiting for the decision, yes.

All right. So I have another question. So you talked about that with regards to the TBI, that you're really waiting for the machine that will provide you the 2,000 gallons. Now that machine is a separate machine from the machine that's being permitted at those larger amounts in the tank farm, is that correct?

That's correct.

Okay. So my question is presuming, since you're saying you won't be finished until -- you won't be finished with the 2,000 gallons with TBI until the last quarter. So if, for argument's sake, you were a part of a consortium that won the tank closure, why can't you use the bigger machine to get your 2,000 gallons?

That's a great question, Steve. And I can't -- I'm afraid I just can't address anything associated with that. It's a fine question though.

All right. Good. I'm glad that's acknowledged. All right. Well, look, there -- this company -- the more and more I learn about your company, it's -- you're obviously very esoteric. You're running that. There aren't too many people that can do what you do, and that what has to be realized. And frankly, I'd like to see you have a greater world footprint because the more and more I read about nuclear, it seems like there's a lot going on in the world with this. And a part of the equation, if you're talking nuclear, has to be waste. And you don't see enough discussion about that. So anyway, I would hope to see that your sales would keep going and we have a real, real positive year this year. But anyway, keep on tracking, guys.

Our next question comes from the line of Steve Levenson with Big Rock Research.

Just watching the investments that you've made in the water treatment, the soil separator and GeoMelt, I know you can't give a near-term outlook. But can you give us sort of a 30,000-foot view on what the expected or targeted returns are on those investments? And again, from 30,000 feet, I know it's not tomorrow, although you did say water treatment has commenced, a sort of timetable for when we might start seeing things begin to pick up and ramp up.

Well, Steve, it's difficult to address all of those. But I can say this, at water, we're anticipating $5 million to $10 million a year when we're in full production and revenue source. So we are starting to get the bids out now where we can commit to processing. We had some delays with state of Florida and some other issues at that plant getting its system up and running. But now we're to the point where we can start putting bids in and be able to commit to processing. And so you won't get to those levels overnight, but you will hopefully within a year or 2 once we start winning some of those awards in testing and market on our approach. So overall, Steve, it's difficult to say because the waste comes in sporadically and it depends on the projects and the waste that's generated. But we do see growth overall in our waste treatment segment. Adding new technologies broadens that market and stabilizes it. And the return on investment are typically very fast on these investments that we're making. In other words, we'll be able to pay off or return or pay down our investment with just a few waste streams, sometimes 1, sometimes 3 or 4. So they're very quick, and we just have to keep hammering away and cleaning our marketing strategy.

Okay. And is that specific to the soil or the GeoMelt or it's -- that's sort of mixed?

We still have a couple of soil segregation. We mentioned a couple of calls ago, we still have a couple of those bids outstanding we're working hereon. And so they're taking much longer than anticipated.

The government acts slow when you want something from them versus when they want something from you.

That's exactly right. That's right.

Okay. And I'm sorry, any -- I know you mentioned tech 99. Is there any update there? Is there any further testing or potential customers showing up?

Yes, and Lou mentioned just now -- is that as far as the Medical side goes, Steve?

Right.

Yes. As Lou and Ben were just saying that we've slowed down the divestment significantly, and we're outsourcing a lot of the research and studies on this now. But Lou, do you have anything else you want to mention on that?

No. We basically still have three groups looking at it. And we think with their results, it should give us a very good idea if there's any value there. So at this point, we're more looking -- waiting for results from them to see what they think of it.

[Operator Instructions]. Our next question comes from the line of Wayne Miller [ph], Private Investor.

As I recall, the first -- well, the fiscal 2018 year-end conference call, which occurred after the quarter was over, the quarter sounded a lot more optimistic than what the results have turned out to be. I just have a question is, how the hell can you not know what's going on after the quarter is over?

I can see you're referring to the fact that Q1 did not turn out as good as the...

As you were talking about it after it was over.

Yes. Well, the bottom line is we have a lot more expenses in Q1 than we anticipated. As we mentioned, we had some delays in shipment that had greater impact on the quarter.

But it was already over. It was over on April 19.

Yes. We didn't see the impact to all the numbers until we closed the quarter officially.

Fine. And just to be sure, we filed on April 1, not April 19. So it was over by a day.

Okay. Well, it just seems that the conference calls are always more optimistic than the results that show up 90 days later. And that's enough said for me.

Our next question comes from Steven Fine [ph], Private Investor.

I had one more -- a couple of more things. My recollection of the last call, there really was no statement relative to what you had done because I asked that question, and you really didn't have the sales number. The thing I remember is you spoke about the $17 million that you intended to -- that were going to be signed. So basically, what I'm interpreting relative to this past gentleman is saying is you didn't have the costs at that time when the costs came up to -- because I see the picture rosy, right? You're way ahead in projections of last year when you can sit and say, you have this much and then you have the $17 million. My question -- the reason -- my further question is, Mark, you had said that the 2,000-gallon thing should be done to the fourth quarter. So presuming that's done in the fourth quarter, when do you expect a decision would be made relative to the final stage or moving forward? Do you have any sense of that?

Steve, I don't have a sense of that. It depends on the tank closure contract. But even more so than that, it depends on the fund, the final funding approval for -- and this is funded through DOE Technology Development. And we haven't seen those final numbers for the final budget yet. So it depends on budgets. So I would anticipate seeing some clarity on that irrespective of tank closure in the next month or 2.

When we hear all these comments, like for example, a couple -- a week or so ago, the President was talking to the head Democrat, and they were talking about putting up $1 trillion for infrastructure. So when they talk about infrastructure, do they integrate waste into those discussions?

No. It's all through Department of Energy. No, this is not associated with that.

Yes. Because today, having waste lying around is the same as the need -- the same as if you're having a broken structure.

Our next question comes from the line of Tim Deakin [ph], Private Investor.

So you talked about delays in shipments from the first quarter and so on and so forth. So -- and these -- and some of these factors are behind you, right, now in the second quarter. And so we should get -- shouldn't we get a nice boost in sales and earnings in the second quarter because we've got all this stuff that was being carried over? I mean can you -- do you feel confident in saying that second quarter this year is going to substantially be better than the second quarter of last year?

What I can say, Tim, is that our second quarter is looking -- is significantly increasing over Q1 in revenue, and we've got real momentum heading into Q3. So these -- all these projects we're talking about are ramping up. As you mentioned, the shipments jammed up a little bit. They all kind of split out. Some will be realized -- some of those plays will be realized in Q2 and some Q3. But we're looking at very strong revenue increases obviously with these new projects, but also a couple of initiatives that we're very excited about by Q2 through Q3.

You've got some -- the delays that you're making up from first quarter and then plus you've got these additional $17 million in new contracts, so I mean all of this should give you quite a boost, right, in the second and third quarter?

We're very optimistic, Tim, for both these quarters to be -- to realize a significant increase.

Yes. I think you know that last quarter, it seemed like your investors were enthused and -- but now they're disappointed. You guys have to instill some confidence in the investment community, I don't know. I mean you got to get this company back on track.

Yes. Tim, I'm very sensitive to that, we really are, and the whole management team is. And that's why we're very hesitant to speculate too much until we start showing the numbers.

Yes, I think it's important to build credibility here. I mean you do presentations. You go around and do presentations to different groups. But at the end of the day, you got to put up the numbers.

That's right.

That's what the world turns on. Okay. Well, listen, it's all right. I just wanted to make a comment.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mark Duff for closing remarks.

Great. I'd like to thank everyone for participating in our first quarter conference call. As mentioned earlier, our Treatment Segment continues to grow with approximately $9.9 million in backlog as of March 31. With our Services Segment, we're recently awarded the $17 million of new contracts and are bidding on many more right now, several which can be sustained from the award this year. So overall, we remain extremely encouraged by the outlook of the business and look forward to providing further updates in the next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.