Perma-Fix Environmental Services, Inc. (PESI) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day, and thank you all for joining this Perma-Fix Environmental Services Third Quarter 2019 Business Update Conference Call. [Operator Instructions] And as a reminder, today's meeting is being recorded. For opening remarks and introductions, I am pleased to turn the floor over to Mr. David Waldman with Investor Relations. Welcome, David.

Thank you. Good morning, everyone, and welcome to Perma-Fix Environmental Services' Third 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 third 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 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 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 a reference 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 and on our website. I'd now like to turn the call over to Mark Duff. Please go ahead, Mark.

All right. Thanks, David. We're very excited to report our third quarter earnings today, which we believe demonstrates the success of our growth strategy over the past few years. Our entire company has been focused on the implementation of the strategy and significant time and energy by our management team as well as our staff has been spent to reach these growth objectives, which are reflected in our third quarter performance. These accomplishments set the stage for our performance in 2019 as well as the next several years. Specifically, I'm pleased to report that Perma-Fix achieved strong third quarter operational and financial performance in both the Treatment and Services segments. However, perhaps more important even is that we're very well positioned heading into the fourth quarter and next year. Let me take a minute to recap some of our financial highlights and later, Ben, will discuss the financial results in more detail. Our revenue for the third quarter increased 88% to $22.5 million. Our Services segment revenue increased 332% to $12.4 million, and our Treatment segment increased -- revenue increased 11% to $10.1 million. We generated adjusted EBITDA of $2.4 million compared to $510,000 for the same period last year. And lastly, we've achieved net income attributable to common stockholders of $1.8 million or $0.15 a share for the third quarter of 2019 compared to $221,000 or $0.02 a share for the same period last year. As a result of this growth in our improved contract backlog within the Services segment, we believe that our financial outlook for the remainder of 2019 and 2020 remains very strong. As we've announced through press releases in the past several months, Perma-Fix has realized several successful contract wins that have directly impacted our Services segment performance, both operational and financially. These wins have included several new projects with the Department of Energy Cleanup Program as well as commercial clients, Department of Defense projects and rapid growth in Canada, conducting a contaminated soil remediation . Our success in managing these recent projects has resulted in development of a positive client reference base that is critical towards future procurements for both the prime and subcontractor opportunities. This momentum has been bolstered by a plethora of new bidding opportunities in both the government and commercial sectors that directly align with the Perma-Fix offering, which provides an exciting growth outlook for the coming years. Our performance over the past 4, 5 months has also allowed Perma-Fix to strengthen our management team through additional key staff in the Services segment to include senior project managers, engineers and experienced technicians to bolster our project performance and our customer relations with the new procurements. In addition, we've been able to enhance our offering through new technologies, including our [indiscernible] soil-sorting system with 2 new successful procurement wins this quarter that will support deployment in 2020. Within the Treatment segment; we've broadened our offering through ongoing expansion within each of our 3 treatment plants to include new comprehensive equipment dismantlement capability at our Northwest facility. Continued construction at our Oak Ridge facility to support increased storage and new treatment system deployment and significant upgrades to our Florida facility to enhance efficiency and improve our working conditions. We believe these steps position us to support new procurements within the DOE as well as broadening our offering to several targeted DoD initiatives. The GeoMelt vitrification unit at our Perma-Fix Northwest plant is performing very well, and we continue to increase efficiencies. This new capability allows us to address a large inventory of reactive waste currently in storage at several government locations and provides a substantial multiyear backlog from a new incremental waste stream. As I've discussed in the past, the inventory of this waste stream is estimated to be in excess of $100 million, including large inventories at Idaho as well as at Hanford and here in Oak Ridge. We are continuing to progress on the expansion of our Tennessee and Florida locations, while managing our capital spending. Once complete, we anticipate return on investments in excess of 40% for both these initiatives, and we expect these initiatives to be completed in the second or third quarter of 2020. For this reason, we continue to focus on expanding our market base in the treatment segment, through aggressive marketing initiatives within both utility and decommissioning sectors. As discussed on our last call, we finally completed the closure of the -- our M&EC facility, which consolidates waste treatment capabilities within the 3 remaining facilities. As a result of this closure of M&EC facility, we received $5 million in cash, previously held in -- as collateral for the facility under our financial assurance policy. The Perma-Fix team remains focused on safety on all of our projects and facilities while continuing to drive growth through innovation to our clients that result in tangible cost savings and value. Over the next few quarters, we anticipate the announcement and launch of additional capabilities that will directly result in sustained growth and financial stability in both waste treatment and our nuclear services offering. So to wrap up, we're now seeing the benefit of our strategic initiatives over the past few years. In addition to our strong revenue growth. We're seeing the benefit of our initiatives to improve operational efficiencies within our organizations as well. As a result, I'm pleased to report we achieved net income of $1.8 million for the third quarter of 2019. Overall, we're extremely encouraged by the outlook for the business, and we continue to grow our Services business, which provides us good visibility into the future quarters. At the same time, we're advancing a number of significant opportunities to leverage our fixed waste treatment facilities, providing innovative treatment options for a variety of nuclear waste streams that will broaden our market base. We continue to enhance our balance sheet and anticipate further year-over-year growth, strong cash flow and sustained profitability in the fourth quarter of 2019 and heading into 2020. On that note, I'll now turn the call over to Ben, who will discuss the financial results in more detail. Ben?

Thank you, Mark. I'll start with revenue. Our total revenue from continuing operations for the third quarter was $22.5 million compared to the prior year of $12 million. Revenue from the Service segment was $12.4 million compared to just $2.9 million in the prior year. That's an increase of $9.5 million or 332%. This increase was a direct result of the increased project work in the segment, primarily from contracts awarded in the past few quarters. Revenue from our Treatment segment was $10.1 million compared to $9.1 million in the prior year, an increase of $978,000 or 10.7%. This increase was primarily from average higher -- higher average pricing from waste process and disposed. For 9 months ending September 30, our total revenue is $51.4 million compared to $37.8 million in the prior year. Both of our service -- both of our segments' revenues have increased compared with prior year with the Service segment increasing by 101% from increased project work, while the Treatment segment revenue is up 10.6% from that average higher pricing. Our cost of sales was $17.4 million compared to $10.2 million in the prior year. Cost in the Treatment segment decreased $796,000 as a result of a decrease in the closure expenses at our M&EC facility of $1.1 million last year. The decrease was offset by increases in our variable costs, which relates to revenue. While our fixed facility costs remained relatively flat. In our Service segment cost of sales increased by $8 million as a result of the increase in revenue. Our gross profit for the quarter was $5.2 million compared to $1.8 million in the third quarter of 2018. That's an increase of $3.3 million or 182.6%. Excluding the $1.1 million reduction in closure expenses at M&EC, gross profit increased by $2.2 million or 76.7%. Gross profits were higher -- were impacted by higher revenue in both segments as fixed costs increased only marginally in the Service segment, despite the significant increase in revenue. Our year-to-date gross profit sits at $10.9 million compared to $7.2 million last year. This increase is the result of higher revenue in both segments and the reduction of closure expenses at M&EC offset by higher fixed costs. Our SG&A for the quarter was $2.9 million or 13% of revenue, up from $2.6 million or 22% of revenue last year, and this is due to higher labor-related expenses. Year-to-date, our SG&A were $8.5 million or 60.6% of revenue compared to $8.1 million or 21.3% of revenue in '18. Higher payroll-related and property expense were the main drivers for this increase. Our income from continuing operations net of taxes for the quarter was $1.9 million compared to $317,000 in -- last year, excuse me. Year-to-date income from continuing operations was $1.7 million compared to $1.4 million in the prior year. We had a net income attributable to common shareholders for the quarter of $1.8 million compared to last year's net income of $221,000. Year-to-date, income attributable to common shareholders was $1.4 million compared to $965,000 last year. We had basic and diluted net income per share for the quarter of $0.15 compared to net income per share of $0.02 in the prior year. On a year-to-date basis, basic net income per share was $0.12 compared to $0.08 in prior year, and diluted net income per share was $0.11 compared to $0.08 in the prior year. Our adjusted EBITDA from continuing operations for the quarter, as we defined in this morning's press release, was $2.4 million compared to $510,000 last year. And our year-to-date adjusted EBITDA from continuing operations is $3.5 million compared to $2.1 million in the prior year. Turning to some key balance sheet activity compared to 12/31/18. Our cash on the balance sheet was $2.4 million compared to $810,000 at year-end. Cash from the Finite Risks fund and the operating -- the improved operating performance were the main drivers for that improvement. Our accounts receivable and unbilled receivables collectively have increased by $9.2 million reflecting the increased activity in the service segment. Our current assets are up $710,000 due to higher prepaid expenses, primarily from the renewal of the company's insurance program. Our operating lease right-of-use assets were $2.6 million, representing the present value of operating leases as a result of implementing the new ASC 842 lease regulations. Intangible and other assets were $4.5 million, primarily from the release of the $5 million -- were down $4.5 million, primarily from the release of the $5 million of the Finite Risks sinking fund and the closure of the M&EC facility. Our current liabilities from continuing operations were up $4 million, primarily due to increases in the Services segment. Backlog at quarter end was $10.6 million, down from 11.1% at year-end, but up from the $9.4 million at September 2018. Our long-term liabilities from continuing operations were up $3.3 million, primarily from the new accounting for leases under ASC 842, of which, $2.4 million of the increase represents the present value of our operating lease liability. Our total debt at quarter end was $5 million, excluding debt issuance costs, of which, $2 million is owed to PNC Bank, $2.3 million to our shareholder loan and $670,000 for other financing debt. Next, I'll summarize our year-to-date cash flow activity in September of 30 of '19. Cash used for continuing operations was $3 million. Cash used for discontinued operations was $459,000. Cash used for investing in continuing operations, primarily capital, was $812,000. Cash provided from investing activities from discontinued operations was $100,000. Cash provided from financing was $1.1 million, and this is made up of our monthly payments to our term loan of $717,000, net payments to our revolver of $639,000, $2.3 million from funds received from the shareholder loan, net of repayments made and other lease financing of $119,000. Finally, before I turn the call over to questions, I'd like to take the opportunity to discuss the fixed cost savings in the Treatment segment that resulted from the M&EC closure. At the time the decision was made in 2016 to close M&EC, we anticipated that this would result in a decrease of fixed facility expenses between $4 million, $5 million. The noncash reductions in depreciation and amortization accounted for about $2.4 million of this amount, while the other fixed costs included labor -- including labor represented the cash savings. The cash savings portion turned out to be approximately $1.9 million for a total fixed cost reduction of $4.3 million. The facility is now closed, and we are not incurring costs at this location. So the $4.3 million savings have been realized. However, since the announcement, which was over 3 years ago, the segment has evolved and there's been strategic changes and other changes that have increased in other operating expenses. In 2016, Treatment revenue was $32.5 million and this year, 2019, we're annualized estimate trending at about $40 million. About $5 million of this increase has come from new business that was not at M&EC. In order to generate this new revenue, we've incurred additional labor and of course cost of living increases that have increased payroll by about $1.5 million. And the other big number that's gone up has been the health care cost, which have increased about $400,000. In addition, the costs -- certain costs have been incurred at M&EC through June of '19 this year, and there've been a few other unusual costs, which annualize at about $1 million. These should not recur moving forward. So in summary, our fixed cost of goods sold in 2016 were approximately $19.5 million. 3 years later, our third quarter annualized run rate of these fixed costs are $17.5 million. That comes from a decrease of $4-plus million at M&EC, which is partly offset by the $2 million of new -- of costs from new business and inflationary related increase. With that, operator, I'll now turn the call over to questions.

[Operator Instructions] And we'll go next to the line of Howard Brous with Wellington Shields.

Mark, Ben, congratulations on just not only a great quarter, but the whole process of what you've been doing since you joined the firm, Mark. So congratulations, much impressed.

Thank you, Howard for appreciating that.

I have one -- but just a couple of questions. But one, specifically, Mark, on a going-forward basis, how do I look at the split between treatment and services, say, not for the fourth quarter, but certainly, for 2020 and 2021? Could you give me some sense of that, please?

Yes. I'd have to say, right now, we're -- we'll probably close this year in the 50-50 range. So it's just about half. And next year, it'll be more 40% to 60%, 60% being Services. And I mean we see a much steeper Services revenue increase, but the margins are not as much as the Treatment -- Yes. So -- but yes, a 60-40 for next year at least and probably close to the -- to 70% in the following years.

70-30, 70% being Services, 30% being Treatment?

Correct.

Okay. Ben, just a couple of specific questions, and I'd like to talk to you offline about some others once the Q is out. When do you expect the Q, by the way?

We are hoping to get it out today or shortly after...

Okay, fine. So tell me -- EBITDA converting to free cash flow, give me some sort of a sense now and on a going-forward basis?

Well, on a going-forward basis, you'll see it -- you'll -- the one caveat is we are ramping up our capital spending for some of these initiatives. So that would be your biggest reduction to free cash flow. But generally, the EBITDA will -- we expect EBITDA to continue to be strong. We had -- much of the cash from the Finite Risk money was really to pay the bills that had accumulated from the closure, and we're past that now. So I think we'll...

No, I realize that. That's what I meant -- just on a going-forward basis, say, looking at 2020 just as an example?

Right. Yes. I think you're going to see the EBITDA -- our cap spending, again, is probably the only where we've got pretty good NOL, so we're not paying taxes for the [indiscernible] for a while. So really, the cap spending, which we're not going to -- we're not going crazy with cap spending. Our usual -- we used to spend in the $1 million range. I think we're going to be looking at more like $2 million a year for the next little bit because of some of the new initiatives. So I think you can take your EBITDA estimates and just factor in about $1.5 million to $2 million of cap spending for a free cash flow.

All right. Unbilled receivables, $9 million, and that it's a very good number compared to December of last year. When do you think that runs off? And obviously, they build up over time. So I'm just talking about current, when does that convert to revenue?

Immediately, Howard, most of our unbilled because of the Service business, it takes -- it's a bit of a process to get an invoice put together. It's an invoice -- every invoice every month is like a small phone book, for those of you who remember phone books and with backlog back up. So we approve -- we book the end -- the revenue at the end of the month. And we usually slip the bill in about a month. So, yes, that's a reflection of the increase in the Service side. And that -- those invoices flip within -- usually within 15 days.

All right. One last question, and I'll defer when the Q comes out and give you a call, Ben, offline. I just have to laugh, allowance for doubtful accounts is up, what part of the government isn't paying you?

Well, we have other customers that are not necessarily government. And we have a standard model where we just accrue when certain things get aged. And some of those good government customers you're talking about like to nickel and dime us with details of paperwork and sometimes it ages. But it's usually reversing once they do pay, but we sort of have to [indiscernible] aging how we go up. So nothing that's of great concern right now.

One last for Mark, if I may, please. If I look at a year from now, how will I look at the company? We talked about, certainly, Services 60% to 70%, 30% to 40% Treatment, what kind of revenues do you think we could be looking at, say, the end of 2020 on a going-forward basis?

Well, Howard, we've been -- our goal has been for quite some time -- actually, 2 or 3 years ago, we set this goal that by the end of 2020 to be annualized at $100 million. So that's been our goal, our focus and that we feel like we're on that track. A lot of things can happen between now, end of next year, but we anticipate meeting that goal on an annualized basis, on a monthly burn basis.

[Operator Instructions] We'll move next to the line of Walter Shankar [ph] at -- excuse me, you're a private investor, rather.

Sure. That's MAZ Capital Advisors. But two questions; first, as you ramp up Service contracts, that requires hiring a significant number of people, to what extent as you work through those contracts, which are multi-period contracts, do these people go through a learning curve and, therefore, become more efficient and profitability could improve as you work through these larger contracts? That's the first question.

Yes. Well, that's tough to quantify, but you're obviously right. We've hired 80 people in the past 2 quarters, starting at about the April time frame. And so we have hired a lot of new folks on, but not so much that require a lot of training. We've been able to find people for our projects that are willing to go on the road and support the field operations as well as some here and in the corporate as well as the treatment plants, but that really hasn't been difficult yet as far as having to train folks. So the impact of that ramp-up, it may be a few weeks of inefficiency, but we're off and running all of our projects within a few weeks. And we typically build that into our schedule that we put in our proposals that we're going to have to train a certain number of people, we may have a couple of weeks of ramp-up. But for the most part, it's negligible so far.

Okay, good. Second question, I'm just going to read a sentence. At the same time, we're advancing a number of significant opportunities to leverage our fixed waste treatment facilities by providing innovative treatment options. Can you put a little more color on what some of those opportunities might be?

Sure. For the plants themselves, each plant, we're looking at new technologies. As I've said a few calls ago, the thing we've been doing very well, our business -- all the staff has been doing very well, it's defining waste streams that either can't be treated that are out there, which is surprising -- a surprisingly large number or waste streams that we can't treat efficiently. And in fact, the other people are treating or that just aren't being treated at all or are being treated inefficiently or more expensively. So we're looking at those inventories. We define those and then our technical folks and our engineers define technologies that can do them less expensively or at least efficiently. And we're in the process of deploying those at each of our sites and new ones. We did several last year when we talk about go GeoMelt and the water program in Florida. We've got a similar ones going on at here in the Crib to treat Freon and to treat some other waste streams that are coming into view. And when these technologies get completed, then we'll start marketing them and announce them through press releases and those kinds of things. So each plant, we hope to have some type of improvement each year and broaden our inventory that we can treat.

Okay. And you still are, at some point, waiting to hear what might happen at Hanford to expand the...

We are. The Department of Energy keeps delaying that award. And I'm not sure what the new date is now. It was supposed to be -- last time we were at a conference they talked about it, it was supposed to be in the December-January time frame. I'd suspect that we're probably pushing out from there. So I'm not sure where it is. And it would be -- all be speculation to take a guess as to when that would be.

Next, we'll hear from the line of Avi Fisher with Long Cast Advisers.

Mark, again, echoing what other people said, you're doing a good job on the turnarounds.

Thank you.

The thing your industry had on for a sec; AECOM just sold it's managed services business. I think Fluor is considering the sale of theirs. What is -- what do you see shaping out of in the industry? Do you see yourselves as acquirers? Just wondering if you could just chat a little bit about how the industry might be shifting as these large primes are going through changes.

Well, that's a really interesting question, Avi. And I don't know what to make of the AECOM, Fluor situations, whether they're right at all or indicative of industry trends or a more just indicative of those firms and where the rest of those guys are. I could speculate and say that it seems like most firms that have big ties that oil and gas have had to make some adjustments along the way based on changing margins and those kinds of things. But that'd be just speculation on my behalf. As far as our industry goes, it hasn't changed that much. It -- the amount of funding that Department of Energy has in their Cleanup Program has been somewhat flat the last couple of years, it's increased over the prior years. And there's a lot of opportunities to bid, way more than normal. And as far as we're concerned, it doesn't really have much of an impact. It does impact who we team with and what -- who -- what subcontractors or smaller team partners are on each team. But generally, we provide the same niche to -- irrespective of how those firms evolve and change. Our niche is the waste management and rad protection services and that stays the same. So -- and that market or submarket has been growing. And as we build our technical staff, we get more to offer. So -- along with our technology. So to answer your question really directly, it has a limited impact on us. And I think it's more -- their changing is more indicative of each firm's specific situation.

Do you think that changes your ability to gain share?

Not really. Because the big boys, you could throw AECOM, Fluor and Jacobs, BWXT and a few others in there. They're going to be Tier 1 prime contractors, and we're not going to bid on a $1 billion contract. So no, it doesn't have a big impact on us overall.

[Operator Instructions] We'll hear next from a shareholder, Mr. Steven [ph].

Congratulations, guys. I think the interesting point in previous calls, there have been comments that what was promised didn't happen. Well, it happened. I think in the last call, I remember, Mark, you saying this should be the inflexion quarter. And clearly, it is. It's beyond my greatest expectation. So congratulations to you all. It's wonderful to watch a plan put into effect and it -- to be executed and so forth. So again, congrats. I find, what's very, very interesting as I learn more about this company is -- and I guess I've got to ask the question to you, first, Mark, when you talk Service, all right? Do you need the plants for Service?

No, we define Service, Steven, as very clearly a field project. So Services are projects or contracts that are not in the facilities, in the field at a client site or support from our offices, but not in the plant.

Ben, I've got a question for you. If right now, we were to rebuild the 3 plants, how much do you think that would cost?

Well, we get this question a lot. It's a lot of tangible...

Ballpark?

Ballpark, probably $50 million, $40 million, $50 million.

That's all?

Maybe more. It's time, it's lawyers, permits. You got a lot of intangibles that it's hard to quantify the cost. But probably that number.

Okay. So I guess where I'm going here is or when I hear you say, Mark, that down the road, you could be 70-30 in Service so that means that, in essence, you could go -- I mean you're not going to do it because you're doing some neat stuff, but that, to me, says, hey, you've got a business that you don't need a plant down the road. So...

No, I would -- yes, I wouldn't -- yes, I would not assume that at all. Our plants to provide a real entrée into our services. And a real niche of that -- for example, we're doing a project out west right now where we're doing the remediation and doing the waste treatment. And they're very linked together, and it's a real discriminator. So no, I would say that we would not be the same company without this plant. And Ben said, $40 million -- the $50 million, that was a ballpark, but I'm sure Lou would agree that the permitting process for those are tens of millions of dollars. So the permits are probably equal in value to the actual facility.

Okay, all right. So -- but the exciting thing to me, having some background in government contract is that you're evolving a business where like it's something like Hanford, that gentleman asked, comes along, it's just icing on the cake. And that you're building a business that can stand by itself and particularly when you say that the greater proportion of the business is going to be Service. And that's great because if you have a change of government or what have you or we got impact there, you're going to have a sustainable escalating business because one would think as you get known more, you do more. But no, at the same time, as you said, which I think is amazing, is that the approach that you're going through relative to the treatment is you're looking at these very esoteric treatments, you're looking at very esoteric things and your capabilities are esoteric. So anyway, that's about all I have to say because I -- and the other point, which no one has brought out, you did $53 million in sales through 3 quarters, I don't think you did what you did last year, $40 million in the whole year, you did what, $49 million to $50 million? In the whole 12 months ahead of you.

Let me guess, $49 million last year. Yes.

Yes, so you did $53 million in 3 quarters, okay? So no one's brought that point up. So we clearly have an escalating thing. Yes, which also creates pressure on you because henceforth, you've got to keep moving forward. But anyways, it sounds very exciting.

Thanks, Steven.

And at this time, we have no further signals from our audience. I'd like to turn it back to Mr. Duff and the rest of the leadership team for any additional or closing remarks.

All right. Thank you. I'd like to thank everyone for participating in our third quarter conference call. As I mentioned earlier, we're pleased with our Q3 results, which reflects the success of our strategic and business development initiatives over the past two years. And we remain highly encouraged by the outlook for the business in Q4 as well as into 2020. So thank you very much.