Perma-Fix Environmental Services, Inc. (PESI) Q1 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Perma-Fix First Quarter 2020 Conference Call. [Operator Instructions]At this time, it is my pleasure to turn the floor over to David Waldman, Investor Relations. Sir, the floor is yours.

Thank you, Christy. Good morning, everyone, welcome to Perma-Fix Environmental Services' First Quarter 2020 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, Executive Vice President and Chief Financial Officer.The company issued a press release this morning containing first quarter 2020 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 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, and good morning.We achieved a very strong performance in the first quarter of 2020, reflecting growth within our Services segment, which increased more than eightfold versus the same period last year. As a result, we more than doubled our total revenue versus the same period last year as well and achieved a double-digit sequential increase in revenue versus the fourth quarter of 2019, even though the first quarter is historically a seasonally weak period.Our sales pipeline for the Services segment remains robust with a number of ongoing and significant bidding opportunities while we continue to hold our own with the Treatment segment as well.As a result, we achieved revenue and EBITDA above our plan despite a significant slowdown at the end of March due to the COVID-19 virus. We felt the impact related to the COVID-19 pandemic beginning in March and into the second quarter, which we believe we have a handle on, and I'll talk more about this in just a moment.But first, let me take a minute to recap some of our financial highlights from the first quarter relative to the same quarter in 2019, and later, Ben will discuss the financial results in more detail.Overall, our revenue increased 112% to $24.9 million. Services segment revenue increased 748% to $15.3 million. Our Treatment segment was relatively flat at $9.6 million compared to $9.9 million for the same period last year. We generated an adjusted EBITDA of $1.9 million compared to $67,000 for the same period last year. And lastly, we achieved net income attributable to common stockholders of $1.2 million or $0.10 per share for the first quarter of 2020 compared to a loss of $672,000 or loss of $0.06 a share for the same period last year.Our management team and staff have worked tirelessly to make the adjustments and implement the precautions necessary to limit the impact of the COVID-19 pandemic on the ongoing operations within Perma-Fix. While we continue to remain optimistic about our ability to get through the pandemic, we are beginning to see the impacts from the slowdown in April and in May. Our Nuclear Services segment began demobilization activities in mid- to late-March and saw a decline in waste receipts from clients at the same time. This resulted in immediate temporary layoffs of workforce for many project personnel along with maximum application of work-from-home policies. This impact was continued - or has continued through the month of April, but we are beginning to realize mobilization on several projects over the next few weeks as field crews are being reactivated to support our field projects.More importantly, we're very pleased to confirm that Perma-Fix has not realized any COVID-19 cases to date within our company or within the households of the employees within the company. This fact has supported our ability to limit the impact to our 3 waste treatment plants as operations have been able to continue with sufficient backlog to address the slowdown these past few months. We remain optimistic that shipments will resume in June to replenish our backlog inventory for waste treatment and position Perma-Fix for a strong third quarter.While the impacts from the virus are yet to be completely defined, it is important to understand that the vulnerability and the potential impacts to the plants and projects, should we realize a COVID-19 illness by one of our employees. Due to the risk associated with this impact as well as the reduction in force, Perma-Fix was successful in securing a promissory note through PNC Bank in the amount of $5.6 million under the Paycheck Protection Program, the PPP. These funds have already allowed Perma-Fix to recall all staff and avoid future furloughs and layoffs for eligible employees as a result of the COVID-19 pandemic.We continue to sharpen our focus within our Nuclear Services segment with nearly $55.6 million in funded backlog, which we expect to continue to realize as revenue this month. We also continue to position Perma-Fix for upcoming procurements and await announcements of submitted bids totaling over $30 million to be awarded in the next few months. In addition, we expect the DOE to announce the winning team for the tank closure contract at the Hanford facility in the coming months as well.Meanwhile, we continue to identify new opportunities to reduce cost, schedule and safety risks that radioactive waste present to our clients through the application of innovative engineering and the use of technology in a cost-effective manner. The most recent example is the start-up of our newest technology, as we highlighted in the press release yesterday, the Perma-Sort system, which has been deployed in San Diego just this week.This latest technology will be applied to the segregation of radioactive soils following dewater operations and the dredging applications. The initial performance testing of the system has far exceeded expectations based on the latest radiation technology - or detection technologies coupled with advanced software applications to provide the highest quality segregation possible for radioactive solar remediation.Our growth strategy has not only involved our Services segment as we continue to realize strategic progress in our Treatment segment as well. For the quarter, our Treatment segment revenue met our expectations within a few percentage points, which was primarily due to the slowdown in mid-March due to the virus. Most of the delayed shipments will push into Q2. And we should remain - we should maintain a solid backlog for waste receipts through the summer of 2020, including an anticipated increase in shipments from the commercial sector. As we approach the mid-quarter point for the second quarter, we've been fortunate that we continue to secure new contracts that will support a similar growth trajectory through 2020, assuming the COVID-19 pandemic begins to subside by the end of May. Once we return to normalcy, we anticipate 2020 will bring a new set of opportunities, both within the Treatment segment and the Services segment, which will further enhance our backlog and provide stability for the company.Most importantly, though, Perma-Fix is a safety-driven organization with a lot of experience in unusual and hazardous environments. And we're committed to the safety of our employees, and we'll stay on top of the situation associated with COVID-19.On that note, I'll turn the call over to Ben who will discuss the financial results in more detail. Ben?

Thanks Mark.I'll start with revenue, and our total revenue from continuing operations in the first quarter was $24.9 million compared to the prior year of $11.7 million, an increase of 112.8%. The increase was driven by the Services segment where revenue increased by $1.8 million in the first quarter of 2019 to $15.3 million in the first quarter of 2020, an increase of 748.4%.Project wins in or after the second quarter of 2019 continued into 2020 and were the main drivers of this improved revenue. Our Treatment segment revenue decreased by $342,000 or 3.4% due to delays in waste shipments late in the first quarter of 2020, which impacted our received revenue.Our cost of sales was $20.2 million, a large increase from prior year cost of sales of $9.2 million. The majority of this increase relates to increased variable expenses in our Services segment, which were up approximately $10.8 million as a result of the increased project activity. Our fixed cost of goods sold in the Service segment were also up about $385,000, which offset the lower fixed cost of sales in the Treatment segment, which resulted from the lower closure costs now that the M&EC facility is closed.Our gross profit for the quarter was $4.6 million or 18.7% of revenue compared to prior year first quarter gross profit of $2.5 million or 21.3% of revenue. Our gross profit in the Service segment was up $2.4 million due to the increase in revenue and also the improved profitability of the project.Our Treatment segment gross profit was down approximately $212,000 mostly due to decreased revenue and also a lower margin waste mix. Our SG&A costs for the quarter were $2.9 million, which were in line with $2.9 million last year. Increased payroll costs were offset by lower marketing and health care expenses.Our income from continuing operations net of taxes for the quarter was $1.3 million compared to a loss last year of $550,000. We had net income attributable to common shareholders of $1.2 million compared to last year's net loss of $672,000. We had net income per share for the quarter of $0.10 compared to a net loss per share of $0.06 in the prior year. And our adjusted EBITDA from continuing operations for the quarter, as defined in this morning's press release, was $1.9 million compared to $67,000 last year.Turning to a few balance sheet items. When compared to the 2019 December 31st balance sheet, our cash balance at the end of the quarter was $1.9 million, which was up from $390,000 at year-end. Our accounts receivable and unbilled receivable cumulatively were down approximately $748,000, reflecting improved collections.Our current assets - our other current assets were up approximately $975,000 due to increase in certain prepaid expenses and the reclassification of a tax receivable from long term to current. Our current liabilities were up approximately $1.9 million, reflecting increased activity in the Service segment and the timing of vendor payments.Our backlog of waste at the end of the quarter was approximately $8.9 million, which was up slightly from the $8.5 million at year-end but down a little from the 9.9 million at the end of first quarter last year. Our total debt, excluding debt issuance and debt discounts at the end of the quarter, was $4.4 million with $1.8 million owed to our lender PNC Bank, $1.7 million owed to our private shareholder loan and $920,000 to other finance leases.Talking about cash flow activity in the first quarter. We had cash provided by continuing operations of $3.4 million; cash used by disc ops of $151,000; cash used for investing in continuing operations of $895,000; cash provided for investing activities of discontinued ops of $13,000 and cash used for financing of $834,000, which represents our monthly payments to our term loan of $106,000; net payments to the revolver of $321,000; payments to our shareholder loan of $312,000; and other financing lease payments of $95,000.Finally, I would like to report that we have extended our credit facility with PNC Bank for additional 3 years through May 2024. Under the credit facility, we increased our revolver capacity from $12 million to $18 million, and we increased our capital spending capacity from $3 million to $6 million per year. And we left our term loan as is at approximately $1.7 million. This extends our relationship with PNC that began in 2001, and we're happy to continue teaming with PNC Bank for another 4 years.With that, I will turn the call over to the operator for questions.

[Operator Instructions] The first question from Howard Brous with Wellington Shields.

Gentlemen, first of all, very happy to hear that you've kept everyone safe in terms of the business and hopefully personal. I also want to congratulate you on just a superb quarter. And what I would like to do, Ben, Mark, after the Q is out, I'd like to go over some items off-line, if that's okay, and I'll arrange that through David, if that's amenable to both of you.

Sure, Howard.

All right. Appreciate that. Has there been a resolution of a Bechtel-Plateau-Aecom dispute on the contract?

Yes, there has, Howard. I want to say maybe 2 weeks ago, the GAO ruled that they were denying the Bechtel protest. And DOE had subsequently made the award to the Amentum team and that is moving forward. I don't know a lot more than that, but yes, they have denied the protest.

Is it a fair comment to say that my understanding, if Aecom won the Plateau contract even though they were a bidder on the TBI, there's a high likelihood they're not going to win that because of the Plateau contract, just historical reference. Is that a fair comment?

Yes. I really can't comment on that, Howard because it would be speculation. But they certainly are one of the three bidders, but I think you could look at the history and, certainly, speculate that, but it would be - it's really hard to say what's going to happen on the award. Right now, the DOE has heard various reports as to when they're going to announce the tank closure, anywhere from a week to August. So I think it could happen anytime. They can announce it any time.

No. I understand that. Is it a correct statement, in reviewing the Department of Energy's budget, that there are basically 2 items that surround the TBI contract? One is the vitrification, which is, to my understanding, you're at least 1.5 years late. That's one. And secondly, that they talk about grout, which is basically treatment. And that's both - both of those are in the budget. Is that a correct statement?

I'm not sure about the vitrification part, Howard. Primarily, the scope of work for the tank closure contract is to operate the tank farms and to provide tank waste for the - flaw in the treatment side of the house when it becomes available. The TBI component of that, which is well defined in the scope, which is a Test Bed Initiative, addresses supplemental waste treatment, of which the TBI is an alternative. That is in the scope of the contract, as you mentioned, as well.

Moving on to a discussion we had about the Navajo contract. When do you expect a resolution or an award, I assume.

Yes. That one, we have no feedback at all on that. That again, Howard, could be any day. It should have been awarded based on projections from the EPA, it's an EPA contract, months ago. So I don't know what has held that up. I assume - I haven't seen a lot of big announcements made during the virus shutdowns. So I assume that it's probably waiting for some approvals. But I would anticipate it'd be awarded this summer sometime.

My understanding, in contacting the EPA going back a couple of months ago, was basically it should have been May, June, but it's the government and the virus.

That's right. That's right.

[Operator Instructions] And we'll move next to Sam Rebotsky with SER Asset Management.

Yes. Congratulations, Mark and Ben, for being safe. And as far as the backlog, could we sort of - could you - it's not clear, did you indicate what the backlog is and what the deferral from the current quarter going forward is?

Yes. We did, Sam. We mentioned that we had $55 million in backlog for the year at this point in Services. And it kind of - it evolves through the year on the waste treatment side. But we have good solid contracts that - on the services side, that will - they are actually, as I mentioned, beginning to mobilize now. We have a lot of people traveling to Seattle and California as we speak that will get that rolling. So we're pretty confident that we'll be rolling pretty well in June and start to work off that $55 million of backlog for the rest of this year. Ben, is there anything else you want to add to that?

The deferral from the current quarter into the $55 million, what did we defer from the March quarter?

That's tough to define. What you're really asking, Sam, along that line, is what has been the impact of COVID on the projects themselves. And that's really hard to define for a couple of reasons. One is a lot of our projects, surprisingly enough, allowed us to work from home. Because some of the projects were new and were start-up projects, there's a lot of document development and training and things that all were scheduled to occur in March and April and through May, actually.So what we don't know yet is what the change notices or contract mods will be necessary as an impact of COVID. But right now, it's pretty safe to say that if we get rolling in June that we'll chew that $55 million up this year. There could be some delays here and there or impacts, but that's pretty close to where we are.

And how many employees do we have and how many were on layoffs?

We have just under 350 employees in the company. The furloughs that we had from the reductions in March - or the projects that demobilized in March were about 50 in the U.S., another 10 or 15 in Canada, and those have all been - in the U.S. have all been recalled - or have been brought back.

Okay. And as far as the loan from the bank, do we have to repay that? Or what is the status? Do we deduct it? Or do we repay it or not repay it? What is the status of that loan?

Sam, by the rules of the loan, we have a 2-month period to pay employees with the loan and pay some other costs that include interest, utilities and lease and rent expenses. After that 2-month period, you take the cumulative amount of those costs, and you asked for forgiveness or you apply for forgiveness with the government. And then if you've used it all up, if that number totals the entire loan, then you could have the whole loan as forgiveness. Anything that's left over becomes a loan to the company, of which there's no prepayment penalties on them, and it's a 2-year loan at approximately 1%. So that's kind of the rules. We're still in that 2-month period. So we are using it to pay our employees who - that have been brought back from the loan.

Okay. That - do we have a judgment or sort of a range of what we might forgive? Or is it premature at this point?

It's premature because, as Mark said, the list of projects ramping back up, we're bringing on more people again, and there may be a need to bring on new people as well.

And do we know as far as the second quarter, whether the revenue will be high enough to be profitable?

No speculation right now at this point, Sam. We're - if things keep moving the way they are for May and June, we're speculating that it will, but we really can't tell at this point what the impact on June will be of the receipt. And I see that as being more risk, if anything, if the DOE sites don't get back into business in June, then we will see some receipts move into the third quarter. But the bottom line is this, is that we still have pretty good backlog at 2 of our facilities. Our Florida facility is slowing down a little bit. But the fact that they're operating and working through their inventory and our projects are moving, we're hoping for a good June.

Well, Mark and Ben, it sounds good that you're doing as best under these very difficult circumstances, and it's nice that we're - we have a decent backlog and the ability to be profitable. Good luck, stay safe and all right, everybody, let's make Perma-Fix more profitable. Good luck.

And next, we'll move to Steve Levenson with Big Rock Research.

Two items. One is on the Canadian business. Being that Canada seems to be more of a national shutdown than here, can you tell us how much Canadian business was deferred, when you think it might come back? And is that lost business? Or is it just something that moves out to the right a little bit because of the timing?

Right now, it's not lost. We still have a contract in place. It - there's a little bit more uncertainty associated with Canada as compared to the U.S. And just from a communication perspective, the Canadian National Labs is our client up there. We just haven't worked out the details for remobilization. So we can't answer yet what the impacts might be. We don't anticipate any impacts in regards to reduction of scope or reduction of costs, something like that. We expect everything at this point from what we know to slide out to the right.

Okay. Are they providing anything like CARES? Or is that something that CARES covers, even though it's outside the U.S.?

CARES does not cover - go ahead, Ben.

Yes. CARES does not cover, and most of their programs that we've seen up there have focused more on individuals, paying individuals, and not the people, not the companies the way the CARES Act does.

Got it. Okay. The other question is about your new Perma-Sort device. Is that something you see as only operating yourself? Or is that something you might bring out as a product line and sell to third parties?

That's a very interesting question, Steve. We have been asked that. At this point in time, we only see it operating ourselves, but we are exploring that. And we see it as more - because of the training required to operate it with the radiation technicians as well as our RAD engineers that run it, we see us doing it and being more of a discriminator for actual project work and see that as a better opportunity for us. But in the future, we have - we are considering that as an alternative.

Okay. And is the intellectual property in the device more in the software? Or is it in the sensors or both? Or are the sensors commercial off-the-shelf items?

The sensors are off the shelf. It is definitely in the software.

[Operator Instructions] And we'll move next to Avi Fisher with Long Cast Advisers.

Nice work on the quarter and keeping everyone safe. I just had 2 quick questions. In the - as you mobilize or demobilize, who - are you able to get change orders on the contracts? Or do you have to pay for those mobilizations and demobilizations? Curious how that's handled. If you have to demobilize later in the future, how that's paid for? I'm curious about that.

Sure, Avi. Thank you. Yes. It all depends on the contract. Generally, if you're demobilizing because of COVID, it will likely be a change. I don't want to speculate on contract negotiations. But typically, something like this is a change order. On some of our contracts, particularly ones in California, we did not actually demobilize. So in other words, we hadn't already mobilized. So we're just sliding the schedule out a little bit. There's limited impact on those. But for example, our Seattle project where we demobilized 50 people, there will likely be a change notice associated with those additional costs.

Got it. So at worst case, you'll share some of it. Likely get change orders from a customer.

Correct.

And then I'm curious about - are you having any issues getting PPE and getting equipment to keep your people safe? Curious if you can talk about that a bit.

Yes. It's a good question, too. No, we have not had any problems at all. We were nervous about that initially, Avi, when all this started happening, but we had really good stockpiles of inventory in the company. And we've centralized that at a corporate level to make sure all of our plants and projects have what they need. It turns out that most of what we use is a level of sensitivity or rigor above what you see for COVID.In other words, we do a lot of scuba and supplied breathing air types of applications and other respirator types of applications, a lot of which are reusable and can be cleaned. So we don't use as many like the N95s. And so we do use some, but we have stockpiles of those, and we have not had any impact whatsoever from the PPE shortages.

And are there other sort of adjustments you've been making or, once you mobilize and get people on site, will have to make that changes the margin expectations on a contract? So you need more trailers to keep changing rooms, a little more spread out, more people because of the utilization, stuff like that?

Interesting enough, Avi, no. We haven't seen that yet. Just so happens that what we're dealing with is radiological contamination. So for example, our guys at the Hanford or Richland facility, they're dressed out when they're working most of the time anyhow. So there's very little impact because of COVID. We may have some spacing in facilities, in the treatment plants.We have a very rigorous safety plan that we've implemented in each facility and in each project. And it includes things like social distancing when you're not - when you're walking in and out and temperature readings and those types of things. They're very well detailed for when you are going in and out of the plants. So when you're working generally at the plant, productivity, in other words, is not significantly impacted on our projects or at our plants.

And it appears there are no further questions today. So I'll turn it back over to management for any closing remarks.

Great. Thank you. I'd like to thank everyone for participating in our first quarter conference call. As I mentioned earlier, our strong performance in the first quarter of 2020 reflects the success of our strategic and business development initiatives over the past two years. And based on our current sales pipeline, accelerated bidding activity and our backlog, we're highly encouraged by the outlook for the business this year. I thank you again for participating.

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and have a great day.