Perma-Fix Environmental Services Inc (PESI) 2008 Q2 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Perma-Fix second quarter fiscal 2008 conference call. At this time all participants are in a listen-only mode. Following the conference we will conduct a question and answer session.

(OPERATOR INSTRUCTIONS)

As a reminder this conference is being recorded, today, August 7th, 2008, It is now my pleasure to turn the call over to Mr. David Waldman with Crescendo Communications. Please go ahead, sir.

Thank you. Good morning everyone and welcome to Perma-Fix Environmental Services 2008 second quarter conference call. This morning we have Dr. Lou Centofanti, Chairman & CEO, and Steve Baughman, CFO. The company issued a press release this morning containing the second 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 Litigation Securities 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 of 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 like to now turn the call over to Dr. Lou Centofanti. Please go ahead Lou.

Thank you, David, and welcome everyone. As you know, this quarter has probably been one of the most eventful quarters in the company's history. The biggest event being our team winning at the Hanford Plateau contract. Before I get into that though I would just -- had another event here that I would like to announce because of its importance.

We just completed funding approximately $7 million refinancing from PNC, our bank, part of our $25 million credit facility. The new note is a four-year loan amortized over seven years. There is an interest of prime plus one. These funds are in addition to our $18 million revolver capacity and will provide supplemental liquidity in the forms of working capital and capital invest in the future growth of the company. So we are very pleased with PNC's continued faith in us and what we have been doing.

The big event of the quarter of course was our team winning the Plateau contract at Hanford that we announced in June. As I have discussed in the past, we have been very active in the bidding process for on-site management projects at DOE, and we were pleased to report in June that our M&EC Division was part of the consortium that won the Plateau Remediation contract at the Hanford site in Richland, Washington.

The project is to clean up the legacy waste that is a result of decades of plutonium production for the U.S. defense program. This is basically a cost plus award fee contract with a base period of five years and an option to renew for an additional five year period.

As a sub-contractor in this project, our M&EC subsidiary will provide waste facility operations expertise in support of the team's mission to perform remediation cleanup and waste management and activities for the DOE. In addition, our Perma-Fix Northwest facility located adjacent to the Hanford site will also provide local support for the contract.

Playing a role in the monumental Hanford cleanup project alongside some of the major players in the industry is particularly gratifying for us at this moment and really, as I said earlier, is a major turning for us. Although the contract has now been awarded and we are passed the protest periods, the project will not actually begin until October 1. We are presently in the transition period of the contract. So, the impact on the company will be minor until really '09. We will see some revenue in the fourth quarter but basically a major impact in '09.

The dollar amount of the contract for the team as a whole was $4.5 billion over 10 years. The exact dollar amount of revenue that we would derive is very difficult to determine at this time. But, as we look at our scope and parts of the project, we expect to recognize approximately $40 million to $50 million per year for both the onsite work that we are working on the Hanford reservation and for offsite work that we will do under this contract at our Richland facility.

We are so very excited about this project. Right now, our major focus is staffing up the project and putting in place the right team to basically hit the ground running on October 1. We will have approximately, when we are fully staffed up on this project, about 250 additional employees.

As the onsite work continues to be our major focus for us moving forward and again, as I have mentioned in the past, we are continuing to bid on additional projects for onsite management and watching for new opportunities on the onsite management side.

Now, let's turn to our results for the quarter. Revenues within our nuclear segment increased by 17% over the period last year. This included sales from our Perma-Fix Northwest facility at Hanford, which was acquired in June 2007. We are very pleased with this despite, as we have talked about over the last year, the industry-wide slowdown that we have seen throughout DOE.

Another milestone for the quarter was that we did receive our draft permit from EPA for PCBs and I know you all ask and have heard this many, many times but we are making progress although fairly slow, but we are now within sight of a permit here, we think.

And, we expect over the next several months that we should see a permit. Once the permit is issued, we will be in a very formidable position as a commercial entity authorized to treat this type of waste in the U.S. And, as I said in the past, we have a good reason to believe there is substantial government and commercial backlogs of these type of wastes.

I'm also pleased to report that we completed the sale of our Tulsa industrial facility. We sold it for $1.5 million in cash, subject to certain, of course, working capital adjustments and assumption of somewhat liabilities.

We have now sold three of our industrial facilities, which leaves us with Ft Lauderdale and Orlando and Valdosta, Georgia. With the sale of the -- the ones we have sold were major underperforming facilities and the sale of these has taken a major burden off our management in terms of focus and time and has allowed us even to put more time on the nuclear side.

The remaining facilities, Valdosta, Ft Lauderdale and Orlando, are operating in a positive mode combined and generating good cash flow, and though we are committed to selling these facilities, they are presently not a drain on the company and not a distraction and really looking for the best opportunities with the.

As I have always mentioned, we are continuing to look at new opportunities on the treatment side, on the service side, and to grow the company and that is continuing from all those areas we have talked about in the past.

And to wrap up, a recent DOE audit of this operation estimated that the cost of DOE to complete the cleanup that they started will probably eventually reach over $300 billion at 25 sites where weapons were manufactured. And, it will take at least until the year 2062 to finish the cleanup. That is $50 billion more than the last time they reviewed it. And, as we watched this we think that it is probably still is under estimated.

We have the technologies; we have the experience. This new contract gives us a whole new bag of tricks to handle, treat and deal with DOE's problems. We are very excited. We see tremendous opportunities right now. We think the company has never been better positioned to be the, or one of the, major players in the nuclear fuel cycle in terms of clean up and handling of nuclear waste.

And, we are really excited about where we are at the moment and what lies ahead. I think for the next year you are going to see some fairly dramatic results because of what happened in this quarter. With that, I will turn it over to Steve Baughman to talk a little more about the numbers.

Thank you, Lou. I am going to take a moment to go over the results for the quarter. Starting with the income statement, total revenue from continuing operations from the first quarter were $15.8 million versus last year same quarter of $13.5 million. The nuclear segment realized revenue growth of $2 million or 15.4% for the quarter versus the same period last year.

Excluding our Hanford operation, revenue decreased by $1.2 million. As we mentioned in our press release, and Lou mentioned also, we have seen a slowdown of DOE work during the quarter.

Total cost of sales was $10.9 million in Q2 versus last year's $8.7 million for the same period. Nuclear costs exceeded last year by $2.2 million mainly due to costs generated at our Hanford facility. Nuclear cost of sales excluding Hanford were flat compared to last year.

Gross profit for the quarter was $4.9 million or 30.9% of gross revenue versus last year's $4.8 million or 35.5%. The declining gross profit was due to lower volume and lower margin projects compared to the prior year.

Total sales and admin costs for the quarter were $4 million versus last year of $3.8 million. Our Hanford facility accounted for $716,000 in admin costs. Income for continuing operations for the quarter were $399,000 versus $752,000 for last year. The loss from discontinued ops was $49,000 versus income from discontinued ops of $470,000 for last year same quarter.

Net income was $458,000 versus last year's net income of $1.2 million. Net income included a gain on the sale of Tulsa of $108,000, segment profit for nuclear was $1.8 million versus $2.3 million last year. Our engineering segment generated $134,000 in segment profit versus $43,000 last year. Total earnings per share for the quarter were $0.01 versus $0.02 last year. Year in date earnings per share were $0.03 which includes the pick up of $0.04 per share from the disposal of discontinued ops.

Now moving to the balance sheet, trade receivables decreased by $4.4 million from year-end. [Our Tulsa] receivables which were sold prior to the divestiture totaled $674,000 and DFSI's receivables dropped by $2.1 million mainly due to the receipt from a large customer.

Increased collection efforts at our M&EC and Hanford facilities also impacted the reduction. Unbilled receivables decreased by $1.3 million from year-end due to increased billings at M&EC. Current assets related to [disc ops] increased from $5.2 million at year-end to $2 million at quarter end due to sales of Maryland, Tulsa and Dayton's trade receivables as part of the asset sale.

[EP&E] related to disc ops decreased due to the sale of Maryland, Tulsa and Dayton' fixed assets. (inaudible) increased from $6 million at year-end to $8.8 million at the end of Q2. $1.1 million of this went towards our annual contribution of the [Thinking Fund], and $1.7 million went toward the Hanford facility Thinking Fund.

Current liabilities decreased due to reclass of the PNC revolver in term debt from current to long term. In addition, we paid down about $4.5 million in debt in the first half, primarily with the proceeds from the sale of our industrial group, namely Dayton, Tulsa and Maryland.

Now moving to the cash flow statement, I'm just going to give you a quick over view since you haven't seen it yet. We have it done so I thought I would just share some of the information with you. Cash provided by operating activity was $3.7 million year-to-date versus $4.8 million last year year-to-date. Cash provided by investing was $3.8 million mainly due to the proceeds from the sales of Dayton, Tulsa and Maryland which were offset by finite risks Thinking Funds payments.

Cash used in financing was $7.6 million, the majority of which was principle payments on long-term debt. Our working capital position at quarter end was a negative $9.9 million, which includes working capital of our discontinued ops as compared to negative working capital at 12/31/07 of negative $17.2 million.

As I mentioned, our path forward at the end of last quarter was we were going to secure additional financing with PNC which Lou mentioned we succeeded in yesterday by adding $7 million in funding from our term note. We are going to continue the sale of the industrial segment, which should generate additional liquidity.

And then finally, we expect to generate additional working capital in positive earnings for the remainder of 2008. EBITDA for the quarter was $1.9 million versus the same amount last year, same quarter. And with that operator, I am going to turn the call over to questions.

Thank you. (OPERATOR INSTRUCTIONS). Your first question comes from [Robert Browse] from Wunderlich Securities. Please go ahead.

Lou, congratulations on a big win.

Thank you very much. I appreciate it.

Do you have any idea what the split might be on that $40 million to $50 million, management versus treatment?

It's very difficult to break it up at this point. There is a lot of flexibility and until we really get into the contract it is kind of hard, but it is 50/50, 60% management, 40% offsite. Something like that, but it is very difficult for us to --

Do you have a better handle on the margins for the management side? Or, you won't know until sometime in October?

We really won't know until we get into the project. Again, the whole thing has a lot of ifs, ands and buts. And, until we get into it, it is kind of hard to judge it. The numbers we gave you are pretty realistic but management fees on the onsite, and again this is based on performance, so it is difficult to give you numbers but it could be 6% to 8% bottom line.

And, out of an addition -- besides the 250 employees that you are going to add, do you have any estimate as to how much G&A you are going to be able to associate with the Hanford contract?

We should be able to work some of that G&A but until we get into it, it is not clear.

So, the next conference call you will have a much better handle on it?

We hope so.

Okay. Congratulations again and I will get back in queue.

Thank you.

You next question comes from Dennis Scannell from Rutabaga Capital. Please go ahead.

Hi Lou, hi Steve.

Hi, how are you doing?

Doing well. Again, congratulations. So to get just a little bit more clarity, the 6% to 8% bottom line margin that you are talking about for the management portion, is that an EBIT number, is that a net margin number?

That is a net.

Net. So all your expenses and any debt you would associate with that contract.

Shouldn't be much debt.

Yes, there is not much debt.

Okay.

That wouldn't be included, but everything else would.

Okay. And then, on the part that would be actually treating the waste flowing through M&EC, would that be that additional kind of 35% to 40% gross margin or again would the margin structure likely be different?

No, that would be under our normal contracts, normal rates.

Okay. And then, of the 250 incremental employees can you talk a little bit about how you would be phasing them in. would we see 250 new STEs at December '08, or would they phase in through '09? Just in terms of kind of --

You put in a management team over the next couple months of 10 people, then on October 1, you add 220 people. They are basically already there. We will pick up the existing team that are operating the facility.

Will there -- just in terms of thinking how you management those incremental costs as the project ramps. Is that a -- so we will see a boost in your labor costs, I guess some of that would flow through cost of goods and some might be in SG&A. Will there be revenues to offset that? I know revenues will increase more in '09, but I'm just kind of --

No, any costs we incur in the fourth quarter, after the contract starts, are covered by cost plus revenue.

The beauty of cost plus. A couple of other just quick little things, Steve on the $180,000 gain for Tulsa. Did that flow through the discontinued operations net line?

Yes, it did.

So the unit shows a $49,000 loss. We aren't talking a lot, but we had discussed that those three remaining units are at least cash flow positive. So does that mean that they will continue to lose money at the net line?

I think what we will start to see is actually we will be making money at the net line because with the operations that are left over, which is primarily in Florida and Georgia, we expect to be profitable going through the rest of the year.

Okay, good. That is comforting. It should certainly make them more attractive to potential buyers in that state as well.

And to expand on what Lou said, we don't see any drag from industrial going forward.

That is great. And then, one last thing. Can you split out for me at quarter end what the actual debt was that would be in the current liability as well as in the bulk long-term liabilities.

We've got IRS debt of about $3 million.

And that is in the current?

That is current.

And then on the long-term side?

Long-term is just our revolver with PNC.

And the total there is now?

$5.4 million.

What happened to that KeyBank note? Was that -- have you guys paid that off?

No, we still have that and that is in the current. It is in current and we owe $2 million on it.

Okay. Total debt at the end of the quarter was $10.4 million? Is that right? $2 million KeyBank, $3 million IRS and $5.4 million drawn on the revolver?

Yes.

And then, pro forma we add another $7 million that you just extended on the term note but you have accepted that cash?

What we are going to do with that is pay off -- those funds are going to pay off the revolver. But, we will have obviously availability of the revolver and you should see a change in our debt structure.

Okay, that is helpful. I think that is it for me. Thanks a lot.

Your next question comes from Walter Schenker from Titan Capital. Please go ahead.

I am sorry if I missed this. I am easily distracted. Going back to the provisional permit on PCBs and trying to understand what goes wrong, that's a bad way of putting it, from here to there. What is left to do and have there been any technical, I think is the right term, complaints, wrong-term, about that provisional permit to this point?

The draft permit is issued. We had a public hearing. We have not heard anything of significance either in the public hearing, the questions that came up in the public hearing from some of the people interested in our facility. We have given them tours, given them more data. We think everyone has been satisfied.

The next step is when the comment period ends here in two weeks. We will then sit down with EPA, one last time, and if they have any comments or questions or issues, reviewed in probably, oh my guess would be within a month. After the end of the comment period, we hope to have a final permit. Now the way it works is it won't be effective for another month after that. So, within about two months, we could have our final permit. Or, we could actually be treating waste.

Okay, and --

And, we don't see any roadblocks at the moment. I mean, nothing has come up that would indicate a problem for EPA or anything else.

Okay. And just to reiterate things you have said before, while you ramp as a function of your success in treating them and your learning curve in treating them, you have a backlog of PCB-tainted waste which will allow you once you are allowed to operate to start and move up as you feel comfortable to a reasonable level of treatment of PCB waste once you are allowed, I'm using the word allowed six times, once you, in fact, start that process.

We have in storage waste we can already treat and we have identified a lot of waste in both DOE and commercial that we will immediately go after. And, we already have, there is just not a lot of value in trying to move it to our facility and plug up our facility until we are able to treat it.

And this process should be at least as profitable as any other incremental volume to that facility?

It should be -- the treatment until operates at about 50% capacity today. If we could double our through-put, the cost of treating extra waste is minimal. So it should be a very profitable -- initially it should be a very profitable operation.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS). Your next question comes from [Ronald Rubin], private investor. Please go ahead.

Hi Lou, how are you today?

Fine, how are you?

Good, good. Believe it or not, I think I spoke to you about 15 years ago. I've been a shareholder for many years.

Well, thank you for the confidence in sticking with us.

Yes. So I was just wondering -- obviously we've been trading in such a narrow range for such a long time, are we trying to create some excitement with this news to try and get the word our and build our share price up a little bit?

Well, as I had one other fairly sophisticated investor call me about a month ago and say, "well, I've been with you now for about six years and I look back at what your balance sheet looked like, what you were doing then and what you are doing today" And stock price is about the same. And so, there has been tremendous improvement both in the basic numbers and our position.

I can only say, as I sit here today I think this thing is worth a lot, lot more. You just could never duplicate what we have, what we have put in place for the value of this company. And so, I think it is worth a significantly higher price. And, I think as we go into '09, I think you are going to see it on fundamentals. I think you are going to see numbers on the revenue and earnings side that should support a much higher price.

So, whether you look at this from a strategic point of view, if you are a major nuclear company trying to get into the U.S. market, you could never duplicate what we have for the value of this company, two to three times our value right now.

Okay.

So, I think it is there, the value is there. It has not been recognized, but I think over the next year we should be able to see some of that value continuing to come out.

Okay. I guess we have a market maker out there that is promoting the stock.

We have, of course David Waldman has been promoting it with me and we have a variety of market makers. We still don't have an analyst. One of our problems has been that we are so small, up until today, that the analysts have shied away from us. But we have four or five that have been following it closely, that are in the space and my hope is to have an analyst here in the very near future that could really lay out the story probably better than we can, independently of us.

Okay. It's good to talk to you again.

Well, thank you very much and thank you for your long-term support.

Okay. All the best.

Your next question comes from Al Kaschalk of Wedbush Morgan. Please go ahead.

Morning Lou, morning Steve. I was wondering if you could just comment. You mentioned the DOE slowdown over the past 12 months, or last couple of years probably. Where are we at going forward here on the next cycle and when is the timeframe for awards under that cycle?

Well, there are several events that have been occurring that have negatively affected funding. You have -- in one sense, DOE has a basic budget and 90% of it is committed to people and there is very little of a slush fund there. So when the cut the budget by a very small amount it really hurts the whole operation.

So what we have seen over the last year has been one, a lot of cycle bidding, which has slowed the waste generation down, two, we have seen a stagnant budget. You know the President has continued to push to cut the DOE budget at the same time Congress has come in and upped the budget. So, there has been a back and forth between the two of them.

Therefore, as we sit today, Congress did not pass a budget for DOE. And, that is not necessarily bad because they have continuing resolution that they will probably pass instead, is not a too bad budget for DOE. It is better than what the President proposed.

So, as we sit today, it is really going to depend on one, the new Congress coming in and how we fund DOE and we are sort of right on the edge of how much money they have. On the other hand, like winning this Hanford contract, for us now we have become a part of the slush fund that sits there. They are going to have to pay those salaries no matter what to maintain the facility.

So, it is going to be real important what happens with the DOE budget for waste treatment. How much money will they have left over to send waste offsite. You know, in one way they are continuing on trying to focus on saving jobs and continuing to make the facility safe.

So, that is usually the first priority. The second priority is then is get waste offsite. So, it will depend a lot on the new budget. If it stays about the same, we should be in real good shape, which I think it will. I don't think either candidate is going to propose cutting the DOE budget right now.

If we assume that the budget was left relatively flat, or even slightly down, are there programs that you are looking at and have in mind the timeframe over the next 12 months for those that would be RFP'd or RFQ'd and awarded.

Well, all the new bids we are doing in several areas. One is for the onsite work and they are pretty well all programmed in. that is the -- we have already bid on the [True Waste] Operations in Oak Ridge. We have a -- I think there were five teams that bid on that so we have a 1 in 20 -- we have a 20% chance on that if you do simple arithmetic.

We think we are of course a little better than that. Then you have two or three projects coming out. The Advanced Mixed Waste facility at Idaho which we will one way or another bid on. That is one of our top priorities. Then you have -- we have a couple other projects we are looking at at this point, where it is better not to talk about until we get a little more into them.

And, then we have the other longer term one that we are looking at is level of high activity project where we are looking at options to move in to high-level waste, high activity waste and that is mostly through Hanford.

Again that is -- in about six to eight months when I can really talk about the details that could be -- if we are successful in what we are trying to do it could become a very exciting project, dwarfing a lot of the things we are already doing.

Thank you.

And the next question comes from Dennis Scannell from Rutabaga Capital. Please go ahead.

Yes, just a quick follow up. Did you guys have a backlog figure for the end of the quarter and then kind of a question on how backlog will be recognized with the Plateau contract?

Backlog is $13.1 million.

How it is going to be recognized, there is really two parts to that. Remember that is for waste brought into our facility. So, for the onsite work there -- I don't believe there is backlog there, for the onsite work.

But that stuff is categorized then what, put on trucks to head to your Tennessee facility? That's when it would go into backlog?

Or into our Hanford facility. Either one. As the waste goes into our facility, some fraction of it, depending on how fast it is treated will go into backlog.

Okay. And one last thing, on the tank -- the Hanford tank cleanup that went on to Washington Group and Energy Solutions, are there any services, potential opportunities, for you to provide services through your Northwest facility or other facilities, or are you pretty much shut out of that?

No, we already have a contract there. We already provide services for waste treatment for some of the services that come off of that project. And, then the second one we are working on is the high activity, high level waste which is directly related to the tank waste. So, we are looking at options in trying to provide DOE with alternatives for treatment of the tank waste.

And again, would that treatment be done primarily in your Northwest facility, or also out in Tennessee?

If we are successful, they would not move that waste across country. So, it would have to be done either at or on the Hanford installation.

Okay, I see. Great. Thank you.

There are no further questions. Please continue.

If there are no other questions, we appreciate your support, especially you long-term investors out there. I appreciate you listening in and asking questions and look forward to giving you further update on the next conference call. Thank you all.