Perma-Fix Environmental Services Inc (PESI) 2011 Q4 法說會逐字稿

Greetings, and welcome to the Perma Fix environmental fourth quarter conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Waldman, of Crescendo Communications. Thank you, Mr. Waldman, you may now begin.

Thank you. Good morning, everyone, and welcome to Perma Fix Environmental Services fourth quarter and year end 2011 conference call. On the call with us this morning are Dr. Lou Centofanti, Chairman and CEO, and Ben Naccarato, Chief Financial Officer. The Company issued a press release this morning containing fourth quarter 2011 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 212-671-1021.

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. 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 US 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. I'd now like to turn the call over to Dr. Lou Centofanti. Please go ahead, Lou.

Thank you, David, and welcome, everyone. What a year. 2011 was a year of very strong growth, record revenue, and record profitability. Also achieved a number of key milestones, including the acquisition of SEC, a new major commercial contract with one of the leading power companies in the Northwest, the sale of our Fort Lauderdale and Orlando industrial facility, and the unveiling of our new medical isotope project. Quite a year, great year. As a result of these, and other major accomplishments we believe we are well-positioned heading into 2012.

First, let me begin a summary of our financial results. Our revenue for the year increased 21.3% to $118.6 million. Adjusted EBITDA increased 58.9% to $17.1 million. Net income increased 439% to $14.1 million, a very good financial year. As a result of the SEC acquisition, we have redefined our reporting segments into two key areas, Treatment and Services. Revenue in the Treatment segment increased 23.4% to $65.8 million, and revenue in the Service segment increased 18.8% to $52.8 million. The increase in the Service segment was due in part to the acquisition of Safety and Ecology Holding Corporation.

As I have said in the past, we expect in the long run the service side of our business, is where we expect the larger percentage of our growth to come from over the next several years. As with any acquisition of this size, it will take some time to integrate the two organizations. We believe this acquisition is very complementary, and will dramatically enhance the growth potential within our Service segment. Our goals, in terms of this acquisition is to diversify our revenue stream, add commercial business, enter new areas in the government sector.

As we sit today, we're very active on the bidding front heading into 2012, and look forward to leveraging our new service capabilities by offering our customers a much broader scope of services, while at the same time entering new markets and adding new verticals. We're -- in the other areas, we continue to move forward with our new isotope production process. At this point, we've already proven the basic process to produce tech 99 from natural moly, and are now moving into the next phase of testing. We have accelerated our development work on preparing the technology for FDA approval. Once we apply for FDA approval, we'll have much better visibility on the timing for commercialization of the process.

So as we look forward, we've had a very strong year over year growth. We achieved record profitability, our backlog remains strong, and our balance sheet is very healthy today. For 2012, we are very focused on integrating SEC, new project opportunities, and building our sales and marketing group. We remain confident in our prior guidance for at least $160 million of revenue. And this estimate assumes a slowdown from the Plateau contract as we've previously discussed, as the project temporarily scales back in 2012.

Though we have visibility on the revenue side, it's a bit too early for us to give EBITDA guidance. We do see though, as we look forward, 2012 somewhat resembles what we saw in 2011, a tremendous amount of bidding activity at the beginning of the year, with a very -- with most of the strength occurring in the second half of the year. Now with that, I'd like to turn the call over to Ben, who will go into more details on the numbers. And then I'll be back to answer questions at the conclusion of the formal remarks. Ben?

Thank you, Lou. Before I start, I'm going to just expand a little bit on our new reporting segments. As Lou mentioned, following the acquisition of Safety and Ecology, we restructured our Company's management, resulting in a change to the makeup of the Company segments. Moving forward, we will report our results in two reporting segments, Treatment and Services. The Treatment segment will include our four treatment facilities, and the Services segment will include our newly acquired Company, SEC, the Hanford Plateau contract, and our former engineering segment. Historic results have been recapped, to provide comparison with the current reporting.

With that, I'll now start to discuss revenue. Our total revenue from continuing operations for the fourth quarter was $33.3 million, compared to last year's fourth quarter of $25.5 million, an increase of $7.8 million or 30.5%. Revenue from our Treatment segment increased by $1.2 million or 8.4%. Following the strong backlog of our third quarter, the Treatment plan significantly exceeded prior year volume. In our Services segment, revenue increased by $6.6 million or 59.6%. Revenue from the Safety and Ecology acquisition totaled $10.7 million, offset by reductions in revenue from the Hanford contract of $4.1 million.

Total revenue from continuing operations for the 12 months ended December 31 was $118.6 million, compared to prior year of $97.8 million, an increase of $20.8 million or 21.3%. The Treatment segment revenue increased $12.5 million, or 23.4% compared with last year. The Services segment revenue increased by $8.3 million or 18.8%. As with the fourth quarter, revenue from SEC was $10.7 million, offset by lower revenue of $2.4 million on the Hanford contract.

Turning to cost of goods sold, our total cost of sales was $26.9 million in Q4, compared to $19.6 million in the prior year. Our Treatment segment cost of sales was flat at $10.3 million despite the increased revenue, due to lower analytical expenses and outside services costs. The cost of sales from our Services segment was up $7.3 million from prior year. Costs associated with SEC totaled $10.3 million, while Hanford costs were down $3 million, primarily due to lower labor expense.

Our total cost of sales for 12 months ended 12/31 were $89.8 million, compared to last year's $77.1 million, an increase of $12.7 million. Costs from our Treatment segment were up $3.9 million due to the increased revenue. In the Services segment, costs related to the acquisition were $10.3 million, while costs related to Hanford were lower than prior year by $1.5 million, which is consistent with their lower revenue. Gross profit for the quarter increased by $513,000, at $6.4 million or 19.2% of gross revenue, compared with last year's $5.9 million or 23.1% of gross revenue. Gross profit in the Treatment segment increased by $1.3 million, and gross margin was 34.3%, compared to 28.4% in prior year. The waste mix in the Treatment segment resulted in higher margin waste streams, with a minimal increase in fixed expense.

In the Services segment, gross profit was below prior year by $761,000, due to mix of revenue as we had reductions in our Hanford revenue, which were offset by lower margin revenue from SEC. Gross profit for the 12 months ended 12/31/11 was $28.8 million or 24.3% of gross revenue, compared with last year's $20.6 million or 21.1%, an increase of $8.2 million. Gross profit from our Treatment segment increased by $8.6 million, while the Services segment gross profit was down approximately $400,000. As with the quarter, waste mix at the treatment facility produced improved results over prior year, offset slightly by a reduction from the Services segment. Our total G&A costs for the quarter were $4.7 million or 14.2% of revenue, up from $3.1 million or $12.2 million in 2010.

Costs associated with SEC totaled $1 million, while corporate expenses related to the acquisition were $248,000. The remaining variance can be explained by increased incentive expense, tied to Company profitability. Admin costs for the 12 months ended 12/31 were $15.6 million or 13.1%, compared to $13.4 million, or 13.7% in prior year. As with the quarter, $1 million related to SEC admin, while the corporate costs for the year totaled $714,000 related to the acquisition. Again, the remaining variance relates to the incentive expense, tied to profitability. Income from continuing operations was $5.4 million, compared to $1.5 million last year. 2011 income includes an income tax pick-up related to a valuation of deferred tax assets totaling $3.9 million, plus an additional $560,000 from the reduction in our income tax expense estimate.

Quickly, I'll take a moment to explain the tax adjustment in more detail. Perma Fix has approximately $6 million of federal net operating losses which can be used to offset income taxes. In past years, we reviewed our deferred taxes, to determine whether it was more likely than not that these assets would be realized. As such, we fully reserve these assets with a valuation allowance. We annually review this allowance, to determine the likelihood of realizing its value of the deferred tax assets. In 2012, we determined that it was more likely than not that the federal net operating losses and certain other deferred tax assets would be realized. As such, we have reduced our valuation allowance, which resulted in a $3.9 million non-cash reduction to income tax expense. Pretax, our fourth quarter continuing operations was $902,000, compared to $2.4 million in 2010.

Income from continuing ops for the 12 months ended December 31 was $11.8 million, compared with $3.3 million in 2010. As with the quarter, attention should be directed to pretax income in 2011 of $10.8 million, compared with $5 million in 2010. Our net income applicable to common shareholders for the quarter was $5.9 million, compared to last year's net income of $1.6 million. Included in these totals are tax adjustments of $4.7 million and $312,000 for 2011 and 2010, respectively. Net income applicable to common shareholders for 12 months ended December 31, '11 was $14.1 million, compared to last year's net income of $2.6 million. Net income in 2011 included a $1.5 million gain from the sale of the two discontinued operations facility, and also included the same $4.7 million and $312,000 tax adjustments mentioned in the quarter.

Total earnings per common share for the quarter were $0.10, compared to $0.03 last year. Year-to-date earnings per share were $0.25, compared to $0.05 in 2010. Our adjusted EBITDA from continuing operations was $3 million, compared to $3.8 million last year. Adjusted EBITDA from continuing operations for 12 months was $17.1 million, compared to $10.7 last year.

Turning to a couple of items of interest on the balance sheet. As you can see, our cash on the balance sheet is up significantly, as a result of good results, strong waste shipments, reducing our -- aged unbilled, and relowering the Company's term note in 2011. Additional assets related to the acquisition of Safety and Ecology contributed to significant increases in our receivables, pre-paid and goodwill. Other intangible assets increased $4 million, which relates to the fair market value of our customer relationships, backlog and non-compete agreements, which came as part of the acquisition of Safety and Ecology. Our Finite Risk Sinking Fund increased by another $1.9 million, and stands at $19.4 million at year-end. Additional liabilities related to the acquisition contributed to significant increases in our payables and accrued expenses. Our waste backlog at year-end was $14.6 million, which is up from the $6.9 million at the end of last year. Our total debt for the year -- at year-end was $19 million, compared to $10.7 million at the end of 2010. PNC, our lender, that -- makes up $15.8 million of that total debt. Our working capital improved by $9.2 million, ending 2011 at $11.5 million.

And finally, I'll just hit some cash flow items. Our cash from continuing operations was $23.5 million. Cash used by disc ops was $2.7 million. Cash for capital was $2.3 million. Cash used for Finite Risk Closure Policy of $1.9 million, cash for the acquisition, the final pay out on the earn out of [Nuva Tech] acquisition of $840,000, cash used for the acquisition of SEC, $14.6 million. Cash provided by the sale of the two discontinued operations was $7.7 million, and cash provided by financing, net was $3.3 million. With that, operator, I'll now open the call to questions.

Thank you.

(Operator Instructions).

Our first question comes from James Fronda from Sidoti & Company.

Hi, how are you?

Hi, James.

Good.

Yes, I just had a question -- on the Hanford site. I would imagine if there are government cuts, Hanford site might have an issue. But at the same time, it's nuclear waste that needs to be cleaned up. So I guess, do you expect business at the Hanford site to continue to climb? And I guess, is there any read-through on other government projects?

Well, what's happening at Hanford is that the amount of money going there is -- we've seen some delays in our project at the Plateau, in the money going over to the vitrification plant to try to keep it on schedule. So as we sit today, we -- you'll continue to see weakness at the Hanford site on our project. Now the waste is still there. There's -- it's not going anywhere, so it's just a delay, in terms of our activities on the site.

Okay.

So we expect that for '12, and at least half of '13.

Okay, okay.

So now -- that's all subject to a variety of DOE, where it's going, and where it wants to put it's money. So it's -- but the budget for Hanford has held up fairly well in general, so.

Right, okay. And I guess, a timeline on the isotope project for FDA approval. Do you have any idea what it might be?

No, what we're -- we've completed our major work on the first phase which is, can we commercially make a isotope in the quantities needed, at the levels needed, with the various requirements. And we're now entering a phase of finalizing, what we need to do, going through the FDA process.

Okay.

That's a few months of work. And when we complete that, then you have an FDA process you have to go through, which is probably a year and a half process. So we're two years away -- it's still a long term project.

Okay. Right. Okay. And I guess, your use of cash going forward?

I'm sorry?

Your use of cash going forward?

Yes, use of cash-- we've got our usual first quarter requirements, which is our Finite Risk payments, income tax expenses this year, and some of the -- some of the costs we incurred with the acquisition that came off the purchase price on some of the contracts. So that will probably take cash down for a while in the first, but we expect probably, to look the same with the cash by the end of the year.

Okay. All right. That's all I have. Thanks.

Thank you.

(Operator Instructions).

Our next question comes from Michael Potter from Monarch Capital Group.

Hi.

Hi, Michael.

Congratulations on a --obviously, a very active and productive year. Lou, can you give us a little greater color on the commercial utility business that we are developing? Currently, how many utilities are we currently servicing, and what does the pipeline look for 2012?

What you have, of course, all of the utilities go throughout ages about every two years to refuel, to upgrade their plants. And when they do that, they try to do that in the shortest periods possible, and use a tremendous number of contractors to do work on the site. And to -- and the best example was what we did with Northwest Utilities was, we came in, we helped them remove their old heat exchangers. We took those to our facilities for treatment and recycling, and any other waste they generated. So you see every year, probably about 20 plants come on that are needing outage work.

It's a -- you're talking thousands of people at that site during that short period, while they are doing this work, up to thousands of people depending on what they're doing, and all contractors. So we're very focused on that business, and there's areas where we have very significant economic advantages, especially on the West Coast, in the Northwest where -- main facility that can service the utilities. So we see a good market there. We're very focused on the broadening and expanding it. And the project that we're still doing for Northwest Utilities was a great success. They've written glowing letters about how we did it, and how well it worked. So we see a pretty good market there for us.

How does the pipeline look for this business? I know it's a small part of the business but --

Yes, today it's a small part, but it's -- very much fits what we do, especially both on the service side, from a health physics point of view, and on a waste side from a -- being able to help those utilities. So right now, we don't -- we have some minor work with other utilities. We have always did work with utilities. We have nothing like the present Northwest contract lined up, but we see a lot of potential, and we're looking at a lot of bids right now.

And do --

But I can't give you a lot of guidance, other than that it's a multi-billion dollar a year business overall, in terms of the overall service work. Now our part of it would be pretty small. But you've got a lot of opportunity there, where we can compete and add value.

Do we have any dedicated sales and marketing personnel focused on bringing that business in?

Yes. We have two sales people dedicated to the commercial side. And our general sales people are -- have designated clients they're going after. So we have a plan, and we have efforts at -- focused in that area.

Okay, I'll get back in queue--

And as with all stuff in this business it -- you have long lead types in all of these. But we're down the road on a lot of them, so that we're optimistic, we'll see more business.

Okay. Thanks. I'll get back into queue.

Okay.

Thank you.

(Operator Instructions).

Our next question comes from Steve Rudd from USIP.

Hi. Tell me, what are we spending to get into this medical isotope business? What's our cash burn, quarterly for that or at least the last quarter?

Well, our R&D expenses to date have kind of emulated what you see on our statements of, in the $1 million, $1.5 million range per year, $300,000 or $400,000 a quarter. And that's really on all of the testing we're doing at this point. As we move to the next phases with production, and all that may start to go up.

Okay, and -- sorry, did you want to say more?

No.

All right. And in the Times article, which I was impressed that you got into, it seemed to me that the article made the point that General Electric concluded this was not commercially viable. And then we were kind of out there, being the ones trying to do something. What of our efforts to find a deep pocket or a partner who adds credibility to our efforts, how are they making out?

I think the New York Times article wasn't real clear on what's really going on. General Electric was developing a commercial reactor to actually irradiate the moly, which is the first step in our process. So now what we've done is really -- our process is designed, we could use a commercial reactor, but we've really designed it for the various research reactors around the US. So we have multiple options, and we have -- in removing [fluoride] with several of those.

GE didn't really get out, what they've seen and what they're looking at is, that people like ourselves that are doing this, we don't need a large supply of irradiated material for another two years. So therefore, there's not a lot of pressure on GE to make a big effort here, for another year or two. The -- what we have done is -- once we file with FDA -- now I think that will become a moment in time when we'll provide a lot more detail in terms of technology, especially to other people in the business, and really spend more time looking for a partner.

Our first priority here is, is to develop the technology to a point, where it's obvious it does make sense. Then to find a partner who can help us, not so much with producing the isotope, but really distributing it -- is that our first priority would be not to get into the distribution business with the thousands of hospitals and other clients. So it's a little premature. We've developed some plans on how to do it. But the kickoff point where that become, when we have submitted to the FDA, when we could say --

Just --

Yes?

So, I'm sorry, so two parts, Lou. The time frame for the submission will be what, second quarter?

It's hard to say. We're in the final steps of preparing the technology for FDA approval. In other words, looking at all of the FDA requirements, making sure that we can meet them all. I'm still not quite able to tell you, when we will do that. It's -- it's in the months. And it's probably, saying it's in the second quarter, it's possible. But I'm even reluctant to say that, until we get to a point where we are -- we've convinced ourselves that we have no problem submitting it to the FDA.

And we're in the --

And --

We've accomplished the first process which was, can we commercially make the material in the quantities, that the market needs, under the basic gross conditions the market needs, and the answer to that is, yes. The next step was, can we meet FDA approval for our particular process? And as we sit today, we think the answer is, yes. But we're going through the -- all of the final technical steps. We've brought in FDA consultants to advise us, and we have other outside companies, individuals that are assisting us in that area.

Okay. So what I was about to ask, which maybe this consultants statement replies to, is whether we have effectively, a chaperone through the FDA process? Because it's something we have no experience with, and while we all hope that it's a scientifically based process, there is certainly political elements/economic elements that come into it. So I'm just wondering, any thought of getting a -- somebody with bigger shoes than us to carry it, besides the consultants, to carry the FDA approval part?

Well, remember that this is a device. So it's not like a drug. So it's a simpler process, but it is still a complicated process. The -- what we've done initially at this step is, is we have consultants, that have actually got approvals for other technetium generators. They are now on our payroll, and they are helping us define what it is we need to do. We're also working with several universities that have produced tech 99 for medical devices in the past. So we've -- so our first step is -- is using consultants. The approach to larger people will come, when we can tell them that we can pass the FDA process.

Okay. All right. Thanks.

All right.

Thank you. Our next question is a follow-up from Michael Potter from Monarch Capital Group.

Hi. Just trying to do some back of the envelope modeling on the Company. And obviously, we've had a lot of one-time benefits and some charges in the quarter. Can you give us some rough EBITDA guidance for the Company? And maybe not for the year, but where -- a kind of a range, where we should be, where we're comfortable on executing? Is it -- should we be in that mid teen EBITDA range?

Well, I think there's a couple things, especially revenue mix-wise. You know our -- from historic, you know our treatment facilities, when they hit a certain threshold of revenue can be a very strong margin. So I think you want to look at on average mid $20 millions toward the upside on the Treatment side.

Okay.

And then you've got the Services, which is going to start becoming a larger piece of the pie, which will be in your 15% to 20% kind of range. So I think that is one approach. The other, and one of the reasons we did an adjusted EBITDA number, you'll notice on the press release, is that there's some fair market value accounting, unique accounting with purchase accounting of contracts such as this one, that is going to skew your normal EBITDA. And you see the pick up in the tax side. You will have to get comfortable with what we report on the adjustment side as well. But, as with Perma Fix the whole time, when our revenue is up the EBITDA margins certainly show it because of our large fixed cost infrastructure.

Okay.

So you're definitely going to be north of 10% and into the teens, but how much really depends on revenues.

Okay. Do you -- Lou, do you think you will be able to give us a more concrete number, or some guidance with the first quarter conference call?

We hope so. And it is very similar to like last year. When we ended the first quarter, we started to have an inkling, it was going to be a dramatic year. And we tried to send that message in the conference calls, although there was still risk to it. And we see the same thing building now. I've mentioned that Hanford is down, but we see other sites that have picked up, and should make up for what we're losing at Hanford. So I would think so.

There's only so many quarters in a year, Lou, so --

Yes. I know.

And guidance in the fourth quarter doesn't help so much so. Well, it's -- I've always said that, which is from your point of view -- it's a problem, is that we see -- with especially our government side business, with the ups and downs of funding, they are -- they always enter the beginning of the year with a little bit of delay, while they try to get going, with the new goals and new amount of money they have. And so the middle of the year it -- things really -- we see a big surge.

Okay.

As that is, finally starts coming through. And so we, I would hope at the end of the first quarter, I can give you a much better feel.

Can you give us a little update on where we are, with our transuranic and tritium processing?

Well, we've had great success. We're the only facility out there commercial, that can do the transuranic materials. We have a variety of projects sitting out there right now that could hit. And again, the problem we have always faced on the transuranics, is DOE and the government doesn't like to talk about them. And so, we're always somewhat limited in what we could talk about, and that goes -- that's pretty much the same today.

The Hanford transuranics has slowed down, but we see other opportunities. Tritium has, as you know, has slowed down, but it's still there, and we still see opportunities. All -- and as we sit today, nothing for sure. So, but we have a lot on our plate that we're looking at and considering.

Thanks --

So, sorry, I can't give you better guidance. I'm guardedly optimistic, as any good politician would say is, that we'll have a good year.

All right, perfect. Thank you.

Thank you. At this time, we have no further questions. I'd like to turn the call back over to Dr. Centofanti for any closing comments.

Well, thank you all very much. Its been a great year. And by the end of the first quarter and second quarter, I should be able to give you a lot more guidance on the success for '12. Looking forward to a good year though. Thank you, all.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.