Perma-Fix Environmental Services Inc (PESI) 2007 Q4 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Perma-Fix Environmental Services fourth quarter fiscal 2007 conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, March 28, 2008. I will now turn the call over to Mr. David Waldman. Please go ahead, sir.

Thank you. Good morning everyone and welcome to Perma-Fix Environmental Services 2007 fourth quarter conference call. This morning, we have Dr. Lou Centofanti, Chairman and CEO; and Steve Baughman, Chief Financial Officer. The Company issued a press release this morning containing fourth quarter financial results which is posted on the Company's website. If you have any questions after the call or would like additional information about the Company, please contact Crescendo Communications at 212-671-1020.

I would 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. 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 at the Company to differ materially from such statements.

These risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission. 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. With that taken care of, I would now like to turn the call over to Dr. Lou Centofanti. Please go ahead, Lou.

Thank you very much. Welcome everyone. As I've been saying all along, 2007 has been a very challenging year for Perma-Fix. First what has been our efforts at divesting our industrial group and the distractions, the time and energy and also what you see in our press release is also the accounting adjustments that have gone along with that divestiture. Second also has been the weakness we have experienced in our Nuclear Segment.

First, I would like to discuss on the Nuclear. Specifically we were impacted by the current DOE bidding cycles along with budgetary pressures on the part of the Federal government. At the same time, we experienced a shift in product mix towards higher volume yet lower margin waste due to the cleanup cycles that are going on at the various DOE facilities.

This slowdown we believe in waste treatment was systemic across DOE as a number of major contractors -- contracts are now ending and other ones are coming up for rebid. Higher volume yet lower margin waste hurt our margins which was compounded by the fixed cost nature of our business and additional expenses we incurred as we stepped up bidding activities for on-site management contracts.

All that being said, 2007 was still a year of major transformation of the Company. And we are encouraged by the outlook for our business on a number of fronts heading into 2008. First, we continue to seek growing opportunities in nuclear. We believe the sale of our Industrial Segment will enable us to focus greater attention and resources on the Nuclear Segment, which has higher margins, stronger cash flow and substantial barriers to entry.

We've now completed the sale of our Baltimore and Dayton industrial facilities for a total of $5.9 million in all-cash transactions which has helped improve our balance sheet. While we are actively pursuing the sale of the remainder of our industrial facilities, the process has taken longer than anticipated due to the unique circumstances, varied buyers and overall economic conditions which have made it difficult for some of the intended buyers to secure financing.

Our original goal was to bundle and sell all of these facilities as a group which would have expedited the process. However, in the end, we believe that by separating the facilities, the additional time we spend on the process will help us ensure maximum value for these assets. Our current focus is on selling our Tulsa and Valdosta facilities which had been major drags on our historical earnings.

And we are moving forward with both of those facilities at the present time with active buyers. Once these facilities have been sold, we will turn our attention to Fort Waterville and Atlanta, but in the meantime, Fort Lauderdale and Orlando have been very profitable operations and have not been a drag on the Company.

Since the sale of the Industrial Segment is still ongoing, we report these results within discontinued operations and because of that, we have absorbed a much higher percentage of corporate overhead within our Nuclear Segment this quarter. This has had a temporary impact on our Nuclear Segment profitability, and with time, we expect to continue to see that change with adjustments to our overhead.

Second, in 2007, we acquired PEcoS for $11.6 million. PEcoS is a nuclear waste treatment Company in Richland, Washington that treats both low-level and mixed waste. It's important to (inaudible) this facility. The facility is located adjacent to the Hanford site which provides us immediate access to treat nuclear waste stored at this site. The Hanford site is one of the most expensive of all daily cleanups and it also contains the major repository for most of the high-level waste at the Department of Energy.

We've also begun treating higher level radioactive waste at our Oakridge, Tennessee facility, and we were very excited about potentially extending that treatment capability to Hanford so that we can address some of the more complicated and difficult waste streams that exists at Hanford. The Hanford facility was a strong performer for the quarter, our second full quarter of operation for this facility. Until recently, the site, the facility has been focused mostly on volume reduction of radioactive waste, and simpler technology for treating mixed waste.

However, we are in the process of installing more advanced technologies (inaudible) our other facilities so we can to treat more complex waste at Hanford as well. By installing a -- our technologies at this site, we could easily treat a larger portion of the existing legacy waste at Hanford. As we look forward, we expect to drive steadily increasing revenues from this facility as projects in the pipeline began to ramp up and new ones come online.

Third, as I mentioned earlier, we are continuing to step our bidding activities for on-site management contracts. We are hopeful that our increased bidding activity could result in greater participation in on-site DOE management contracts where we are actually part of a team that manages the DOE waste facility complexes.

The advantage of being on site is that Perma-Fix would be able to accurately assess waste streams early in the cycle of disposal. We could help properly characterize these wastes which hved been an ongoing challenge for DOE. But with our unique experience, we think we can accurately and cost effectively help them determine the proper way to deal with their waste on-site and help ourselves and to help DOE.

We've been very -- we were very focused bidding on several of these projects in the third and fourth quarter. This was also a major distraction and -- but it continues to be a major emphasis of the management team and has contributed a higher selling -- G&A expenses within the division.

Whether or not we win these contracts, we still believe we are ideally positioned to capture a meaningful share of the planned waste treatment at these site. Since the example would be at Hanford, we have a facility that's located there. It's the only one available. So that -- there aren't a lot of other options for the facilities.

Finally, one -- and of course we been talking about for a long time now our PCB permit. It is ongoing. We are continuing to see progress everyday even (inaudible) be slow and we're still very optimistic that within the next several months we should have -- we will be successful in obtaining that permit.

I think the silver lining in this slow process is that once this permit is issued, we will be the only entity authorized to treat radioactive PCBs. As we stated in the past, we believe there is a very sizable yet untapped government and commercial market for these technologies.

So to wrap up the fourth quarter, it's traditionally our slowest period. It was magnified by the effects of the current DOE bidding cycles along with the budgetary pressures that are now on the federal government, and fairly dramatically impacted by the accounting adjustments that are flowing through our income statement from the divestiture of our industrial group. This combined with the high fixed cost of our business, the shift in product mix, and the additional expenses as we stepped up our bidding activities all combined to negatively impact both our margins, EBITDA and income for the fourth quarter and full year.

Nevertheless, it's been a fairly dramatic positive year for us with a lot of major accomplishments. We began the divestiture of our industrial group. We acquired PEcoS facilities, the Hanford facility, expanded our treatment capabilities, added the new [South Bay] facility at [MNEC] where we began treating special nuclear materials, which is the first foray really into a treatment of higher problem radioactive waste which, in the long run, we believe could far exceed our current market for low-level waste.

Looking ahead, legacy waste remains one of the greatest problems facing the country. It has to be addressed. Tremendous local pressure on DOE in the fight to clean up the facilities, and we see that continuing. We believe we are uniquely positioned to take advantage and to treat a multitude of these waste streams, especially when you consider the high barriers to entry.

We are very excited about Hanford and our goal is to demonstrate our ability to treat high-level waste at this site. Also, we're participating as I said earlier, in the bidding opportunities for managing DOE facilities, and we think we're in a very good position today to see some positive results coming out of that.

Regarding the cleanup cycles, we have begun to see some increased activity during the first quarter and as I said over and over, we thought there would be continued weakness at DOE into the first quarter and we have seen some of that and really expect to start seeing major improvements the middle of the year in 2008. As I look forward to 2008, I think you will see several things that we expect.

One, you should start seeing much cleaner numbers without the accounting adjustments that we've seen in the fourth quarter. We should return to profitability in the first quarter. We do expect it to still be somewhat weak in the quarter, but we are optimistic at this point that we will be profitable in the first quarter. With that, I would like to turn the call over to Steve who can further discuss the numbers.

Thank you, Lou. I'd like to take a moment and just go over the results for the quarter and for the year. Total revenue from continuing operations for the fourth quarter were $13.8 million versus last year same quarter of $13.8 million. Nuclear revenue was flat last year at $13.1 million.

Revenue generated from our Hanford, Washington acquisition in June 2007 contributed $3.7 million while volume increased by $800,000 and our price decreased by $4.5 million. As Lou mentioned, we continue to see lower receipts and lower volumes of higher margin revenue such as mercury contaminated waste streams. We have also seen a general slowdown in our waste generated it from DOE.

Now the price increase or decrease I mentioned of $4.5 million requires a little further clarification. Half of this decline was caused by two events in 2006 that did not repeat in 2007 one of which was last year we recognized surcharge revenue of $1.2 million from a customer with little or no operating cost associated with it. Our accounting treatment for surcharge revenue is to recognize revenue once the customer acknowledges the surcharge. So in other words, the revenue was recognized but the expenses associated with the revenue would have been incurred in previous quarters.

The other was approximately $1.3 million in [Port Smith] on-site services revenue with a small amount of carryover in Q1 of 2007. Since there was no volume associated with either of these revenue streams, the change in the revenue (inaudible) the price. Excluding the impact of these two events, price was down $2 million.

For the year, revenue from continuing operations was $54.1 million versus $52.8 million last year. Revenue generated from the Hanford acquisition was $8.4 million while price was down $10.1 million and volumes increased by $3.4 million. Price and volume fluctuated for the same reasons that affected quarter.

Total cost of sales was $10.2 million in Q4 versus last year's $7.4 million. Nuclear cost exceeded last year by $2.9 million mainly due to $2.4 million in cost of sales generated from the Hanford acquisition. Nuclear cost of sales excluding Hanford cost increased by $493,000 or 7.2%, while revenue was down 28.3%.

Overall, the volume of drums processed was up 30.29% despite the reduced revenue. This indicated that our processing productivity had actually improved year to year.

For the year, cost of sales was $36.8 million versus last year at $31.1 million. Nuclear cost of sales increased by $6.7 million from $28.5 million in 2006 to $35.2 million in 2007. Approximately $4.9 million of the increase was attributable to the Hanford acquisition. The remainder of the increase was caused by overall 9.4% in the quantity of equivalent drums processed.

Gross profit for the quarter was $3.6 million or 26.1% of gross revenue versus last year $6.4 million or 46.3%. The decline in gross profit was due to the slowdown in waste shipment DOE, a change in the revenue mix from high margin waste streams to higher volume, lower margin waste streams, a lack of surcharge revenue that did not repeat this year and the curtailment of the [Port Smith] on-site service work. For the year, gross profit was $17.3 million versus $21.7 million last year. This decline was primarily due to the same factors that affected the quarter.

SG&A expense, total administrative costs and for the quarter were $3.9 million versus last year of $3.7 million. The increase was mainly due to added cost incurred in the bidding process that Lou mentioned earlier for DOE projects and the Hanford operations.

Operating loss for the quarter was $348,000 versus positive $2.7 million last year. The loss from discontinued operations was $6.7 million versus a loss of $208,000 last year. Included in our fourth quarter loss was an asset impairment write-down of $5.8 million associated with the Industrial Segment.

Net income was a loss of $7.4 million versus last year's net income of $1.9 million. Earnings per share was a negative $0.01 from continuing operations and a negative $0.13 per share from discontinued operations versus a positive $0.4 per share last year.

Now, moving to the balance sheet, we'll talk -- start off talking about working capital. Our working capital position at December 31, 2007 was a negative $17.2 million which includes the working capital of our discontinued operations as compared to our working capital position of a positive $12.8 million at December 31, 2006 or a change in working capital position of $30 million.

Last year, our working capital position was unusually high due to proceeds from the exercise of stock purchase warrants. Approximately $15 million of our working capital was absorbed in the Hanford acquisition. $11.4 million was due to the reclassification of bank debt from noncurrent to current and $3.6 million of our IRS debt moved from noncurrent to current since it will be due at the end of this year.

Just to talk a little bit about our path forward, pending the sale of the Industrial Segment, a re-evaluation of our debt structure to include collateralizing the assets we acquired from the Hanford acquisition with our bank should include. We expect to generate about $4 million in additional liquidity. This, along with the continued progress and divesting of our Industrial Segment should relieve our working capital debt facility and resolve our fixed charge coverage ratio covenant with our bank.

In addition, we expect -- we intend to expand our credit revolver with the bank to include unbilled receivables, generating approximately $0.5 million in liquidity. Along these same lines, we are aggressively working towards getting as much of our $13.4 million of unbilled into the billed category, which allows us to borrow at 85% on the amount billed for our revolver agreement. We also expect to generate working capital through positive earnings in 2008.

Now I'd like to talk a little bit about the situation we had with our bank, PNC. Our position on our bank debt covenants is that with the waiver letter we received in the fourth quarter from the bank primarily waiving the fixed charge coverage ratio we are in compliance with all bank debt covenants. Under generally accepted auditing standards governing our auditors, we are required to forecast our future quarters compliance with bank covenants.

As Lou mentioned, our first quarter has historically been weak. Currently, we do not believe we will be in compliance with our bank covenants at the end of this first quarter. We expect to correct this with the steps I mentioned addressing working capital or secure a waiver from the bank before filing our first quarter 10-Q. With this in mind, we anticipate our auditors will issue an unqualified opinion with a provision related to uncertainty as to growing concern.

Now, moving to the balance sheet, cash and cash equivalents decreased by $2.4 million from $2.6 million last year to $137,000. Last year's cash balance was unusual since we had received approximately $12 million in proceeds from the exercise warrant and options during the year.

Trade accounts receivable were up $4 million with (inaudible) increased invoice and of unbilled receivables and the acquisition of Hanford. Other receivables are down $1.6 million reflecting the receipt of a large surcharge settlement in early February of 2006.

The increases in fixed asset categories and intangibles are due to the Hanford acquisition. The decline in the PP&E included in assets for sale of $6.5 million is mainly due to the asset impairment write-off.

Moving to the cash-flow statement, cash provided by operating activities was $6.7 million for the year ended 12-31-2007 versus $2.4 million last year. This was primarily due to an increase in our turning over of unbilled receivables to trade receivables.

Cash used in investing was $7.6 million with $2.8 million in capital expenditures, $3 million for the [Novatech] acquisition and $1.5 million for (inaudible) as compared to cash used last year investing $6.8 million, $5.5 million in capital expenditures and $1.2 million for finite risks (inaudible) for the same period of 2006.

Cash used in financing was $1.5 million for the year ended 12-31-2007 mainly for the paydown of our long-term debt as compared to the cash provided by financing of $6.9 million in 2006, which was mainly due to the exercise of the warrants. Current liabilities increased by $15 million due to the Hanford acquisition and notes payable and interest payable to the IRS for $3.6 million moving from noncurrent to current. Finally, our EBITDA for the quarter was $736,000 versus $3.4 million last year for the same quarter. With that, now I will -- operator, I would like to open the call to questions.

(OPERATOR INSTRUCTIONS) Gentlemen, there are no questions. Please continue.

Give everyone a minute.

(OPERATOR INSTRUCTIONS) [Stephanie Haggerty, Register and Acres].

I was unclear on the statement about a qualified or an unqualified opinion. Which are we getting?

It will be an unqualified. In other words (multiple speakers)

(multiple speakers) there's not going to be any statement saying you are not a going concern?

Well, it will be qualified with a condition of going concern, but it's an unqualified opinion for GAAP purposes. It's just condition on going concern which is mainly the waiver we have with the bank.

I understand. But -- so, it will say there are questions about your being a going concern?

That's correct.

Okay.

Now, the answer to that is that the qualifier to that is we don't see any problem at all with our bank and the bank will give us a waiver. The question is will they give it to us in time for the 10-K.

I understand. I wanted to ask one other question. The activity in Hanford, if you listen to the things that your new public competitor has to say, Energy Solutions, I swear, that's all they're talking about is Hanford.

Right.

Did they have a huge position up there? I was unclear from when we talked as to how big a factor they were in that location.

They are on one of the teams today that are managing the what is called -- there's two major contracts up for rebid. One is called the Plateau which is a project -- multibillion dollar project to clean up the area. The second is what is called the Tank project. That is managing, building the treatment unit, the [vitrofier] to treat the tank waste. And they are -- they have been involved -- they're presently involved in the Plateau and they have been involved in the past on the Tank. They are the prime bidder. There are two teams bidding and they are the prime -- one of the teams that are bidding each project.

My question is are they bidding against you?

Well, we're not on their team.

Okay.

So remember there are two projects, two (inaudible) each one multibillion dollars.

Got it.

(multiple speakers) project. And we will see what happens. Now, there's really two parts to that. Whoever wins, we still have a very unique position in terms of one, treating waste that exists at that site, because of where our facility is and what is. And then second is moving forward with the high-level waste. This is the low-level and medium-level waste. We have a very unique position. And then on the high-level waste, we think we can offer an option on the high-level waste no matter who wins.

So then would you be like a subcontractor to them, whoever wins?

Well, we would be like what we are today. We are presently a subcontractor to Energy Solutions.

I see.

Energy Solutions runs the Plateau project today as a minor part of a team led by [floor]. We already have contracts with them to accept waste at our facility and treat it. And we would expect that would continue no matter who wins that contract on the Plateau and at the Tank project.

Okay, thanks very much and good luck, guys.

[Robert Jipmunson, Ross Gates].

I guess with the balance sheet somewhat strained, you are obviously not in a position to do your buyback, which I think is probably still in theory effective?

Still effective. Yes.

Okay. So is it fair to assume that you cannot participate in the open market?

I think it would be imprudent at the moment. In fact, one thing that is stretching us that has stretched us is we are very rapidly paying down our debts. We've got a fairly aggressive schedule on principal and interest and that has been -- that's our first priority right now is to continue to reduce our debts and that actually has been one of the reasons our -- we have this problem is because we have been so dramatic in paying down our debts.

That works against you in that ratio. So it's good and bad. If the bank understands that and is happy, and so that's why they're -- it's easy for them to give us a waiver.

Okay. And then the bidding activity that you say you are participating in, the way you word it it sounded like this is something new for you all to participate in bids.

Well, we've been very aggressive in going after these. And we've had successes at a fairly small -- at a small level. So we've won contracts. In fact, we just won one at Oak Ridge. It's fairly small. It's about $0.5 million -- to do on-site work. We have been very aggressive though also in bidding on large ones, but there we have not been successful yet.

And so we see it as a very important sort of strategy moving forward as part of our growth strategy is to at some point be more involved with on-site managing these DOE waste sites. And we are presently involved in two very large projects that we are part of and we will see what happens. I don't want to be too optimistic here because there are -- it takes time to break into DOE. (multiple speakers) entering a whole new area.

Right. Okay. Thanks a lot.

But we're optimistic.

Okay good.

[Craig Eckenthal, Stifel Nicolaus].

Just one quick question. Can you tell me when you are going to be supposedly submitting bids and when you think the acceptance dates are on this stuff?

Well, the bids have already -- the big ones have already gone in. They've been in four or five months. So right now, the schedule at Hanford is the DOE expects -- they said some things -- people have said they issued dates on when they're going to do it, but I'm not -- I don't have a lot of faith in those.

Thank you.

As the dates -- they're under tremendous pressure to award those contracts before the end of the year because if it falls into the new year, you will have a change (inaudible) administration whether it be a new Republican or new Democrat will put them on hold. And so they have tremendous bureaucratic pressure to issue those because they've already done them and they are so monstrous and they are so important.

Our feeling it is that of the two contracts at Handford, they will both be issued probably before September, one before the other. There's more rumors out there than you can imagine, none of which I would put a lot of faith in. So at this point, we're just waiting. But I think by September, both contracts should be awarded.

Thank you.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions. Please continue.

Well, I thank you all very much for your time and effort. I know it's not been the most appealing earnings announcement. But we are, as we enter 2008, we see, and I think you'll see this in the first quarter, much more positive numbers and much more positive effects. So I appreciate all of your time and patience. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you very much for your participation and have a nice day.