Perma-Fix Environmental Services Inc (PESI) 2014 Q1 法說會逐字稿

Greetings and welcome to the Perma-Fix Environmental Services first quarter 2014 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, sir. You can begin.

Thank you. Good morning, everyone, and welcome to Perma-Fix Environmental Services first quarter conference call. On the call with us this morning are Dr. Louis Centofanti, Chairman and CEO, and Ben Naccarato, Chief Financial Officer.

The Company issued a press release this morning containing first quarter financial results, which is off 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 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 statements 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 would now like to turn the call over to Dr. Lou Centofanti. Please go ahead, Lou.

Thank you, David. Welcome, everyone. This call should be relatively short since we hosted our year-end call a few weeks ago.

I will start by saying results were very disappointing, although in line with expectations and what we have indicated would be the case on our last call. We experienced continued weakness in the first quarter due to the difficult fiscal environment.

However, as I have indicated previously, we expected to see improved results starting in the second quarter now that the Department of Energy budget has been approved and set for the next two years, and happy to say that we are seeing those improvements. Improvements in the second quarter have been significant and we expect further improvements in the third quarter, which is the government's end of fiscal year. In the past, when budgets have been delayed, we have seen the DOE rush to spend its allocation before year-end and -- or risk reduced funding in subsequent years.

This impact is usually most visible on the waste treatment side. But, even on the service side, we are now receiving preliminary notifications on contract awards that were previously delayed.

You have seen the recent award of the multimillion dollar United Kingdom contract, further evidence our strategy is working, where we are focusing on more commercial and more international. And we are currently bidding on a number of very similar contracts. We were very excited about the UK contract and that it also shows that our technologies are some of the best in the world. They had to screen a variety of technologies for mercury treatment and had picked ours as the preferred method.

Also remember -- many of you, I'm sure, remember back in 2012, the Department of Energy's prime contract at Los Alamos issued a large master task order agreement for cleaning up an ongoing operations at Los Alamos National Labs. And we are pleased to report we have also been notified on that one, that we have been awarded a contract up to about $1.2 million to process radioactive liquid waste at the site.

And as time progresses here, I think we -- you will continue to see a steady stream of new contracts coming out that we have been awarded. We are actively bidding on a number of very sizable projects, both domestically and internationally, and we look forward to announce these contracts in the near future. In the meantime, we have very much focused on our organization and have continued to reduce overhead expense to streamline the organization and work hard to diversify revenue streams into both commercial and international.

Lastly, probably some of the more exciting things going on, besides the pickup in business, the other exciting event has been the rapid progress we are making on advancing our new process with production of Tech-99. As discussed on the last call, we have now fully validated our technologies through tests conducted both at [Pole Adam] in Warsaw, Poland, and the University of Missouri reactor in the US.

We have witnessed a growing interest in our technology from within the industry and we are in active discussions with several major players in terms of developing strategic partnerships. And our plan is still to apply for FDA and CE approval, which is European approval before the end of the year.

As we have discussed, we have transferred the license for our medical technology into a subsidiary, and we have interest from a number of groups to finance the technology at the subsidiary level. And we are very excited about this new process. We believe it can meet global needs for Tech-99 without the use for weapons-grade uranium.

Our process dramatically reduces environmental concerns and we will produce a much more reliable process for making Tech-99, and does not involve the processing of high-level waste or the production of high-level waste. So, as we sit today, we think will have some very significant announcements in the very near future with that process.

So, to wrap up, we see things turning around in quarter 2. We expect further improvements in quarter 3. We still see enormous opportunities ahead on the service side as well as moving into that more higher activity complex waste streams on the treatment side.

We continue to diversify our revenue streams into commercial and international, and we have dramatically cut operating expenses and overhead expenses out of the business. We expect to achieve an improved profitability and cash flow for the remainder of 2014.

With that, I would like to, at this point, turn the call over to Ben, who will go into more details, and I will be back to answer questions at the conclusion of the formal remarks.

Thank you, Lou. Starting with revenue, our total revenue from continuing operations for the first quarter was $10.5 million compared to last year's first quarter of $19.8 million, a decrease of $9.3 million or 47%. The decrease in revenue was primarily from the service segment, where our total revenue fell by $9.6 million. Much of this, $5.6 million of it, was from the completion of the Hanford contract which completed in September 2013, and the remainder was due to delays in winning new projects to replace other expiring contracts.

Our treatment segment revenue actually increased by about $332,000 or 4.5%. Even though our waste receipts for the quarter were very low, similar to last year. Our cost of goods sold, total cost of sales was $10.4 million in the first quarter compared to $19.3 million in the prior year. Our treatment segment cost of sales was up marginally, $76,000, or 1% compared to prior year.

Our fixed cost reductions at the treatment facility, mostly streamlining workforce, lowered our cost of goods sold by about $712,000. So this was offset with higher variable cost related to the waste mix produced.

Our costs related to our Hanford contract, which, as I mentioned, completed in September of last year, accounted for $4.5 million of this drop in cost as well. The remainder of the variance was due to lower fixed and variable costs in our service segment and related to the reduced revenue.

Our gross profit for the quarter was 9.4 -- or I'm sorry; was $94,000 compared with $537,000 in 2013, a reduction of $443,000. Gross profit in the treatment segment increased by $256,000 compared to prior year. Higher revenue and lower fixed cost contributed to this increase.

In the service segment, our gross profit was below prior year by $699,000. Gross profit from the completion of the Hanford contract actually dropped by $1.2 million, but was offset by higher gross profit in the remainder of the service segment of about $576,000. Again, lower costs associated with reduced revenue in our services group was the main driver of the improved gross profit.

Our total G&A for the quarter was $3.2 million, down from a $4.2 million a year ago. Again, labor cost reduction and outside service costs were the main drops from 2013; legal fees and labor reductions are the main reason for that.

Our loss from continuing operations before taxes for the quarter was $3.7 million compared to $4.3 million last year. The losses applicable to common shareholders was $4 million compared to last year's net loss of $2.9 million. I do want to note that, in the prior year, we included a tax benefit of $1.4 million, which was not recognized this year due to the decision to apply full valuation allowance on our deferred tax asset at the end of 2013.

Our total loss per share for the quarter was $0.35 compared to a loss per share of $0.26 in the prior year. Our adjusted EBITDA from continuing operations for the quarter was a loss of $2.3 million compared to a loss of $2.4 million last year. On the balance sheet, our total cash was down [$294,000], primarily from about $1.5 million of cash used for operations, and cash was -- this cash was used primarily to pay down accrued and accounts payable.

Our receivables and prepaid expenses are consistent with prior years. Our waste backlog was down by about $1.2 million from year-end, and finished at about $6.5 million. Our total debt was -- as it stands at $15.7 million of which [PMC], our main creditor, our credit facilities represent $12.7 million of it. And our working capital deficit was $4.5 million at quarter end.

Quickly, some cash numbers. Total cash from continuing operations used is $2.3 million. Cash provided by discontinued operations was $861,000. Cash used for capital spending was $213,000 and cash received from financing was $1.4 million.

Operator, we will now turn the call over to questions.

(Operator Instructions) Al Kaschalk, Wedbush.

Can you give us an update on the capital raise and where you stand in the timeframe? And then secondly, how (technical difficulty) that leads to, I think, what you said at the end of 2014 you are seeking FDA approval. Is that correct?

Yes. The longer-term goal there is that. We have several options going on right now. Probably the one that is most likely is that we are in -- as you may know, we have bought a public sub on the NewConnect Warsaw exchange, and presently in the process of financing that sub. So -- and we also have other options in terms of -- that we are talking with, with people who would like to do it privately.

As we sit today, if I had to, probably the one that will probably occur first is the financing in Europe. We have a variety of things going on in Europe that could dramatically help us. And we have a partner there in [Pull Adam] whose [mix] generator is very intricate and distributes Tech-99 generators, and we are working closely with them.

There is a big interest in Europe in terms of halting the use of highly enriched uranium. And we have several funds in Europe that are very interested in financing the Company. So, if that occurs, if we are successful in completing that, we will then end up with a subsidiary that is public in the European markets. And I think that could be completed by -- within a little over a month.

Okay. So, by the end of the second quarter?

Yes. Now, I mean, there is still a chance it won't -- we are in the middle of a financing, so we are not -- there is always a chance it won't work. But right now it looks pretty good.

Would this then be viewed as a strategic investment by them or this is private investors? I'm sorry. I wasn't clear.

Both. I mean, we are focused on the private investor side in financing. But we also have strategics who are interested.

Okay. And have you shared the dollar amount that you are looking to place into this?

Yes. Initially, it is approximately $3 million to get the Company up and running and set up and get it moving. So the first financing will be fairly small at this stage. We should end up still being a very major shareholder, then, in the subsidiary.

But your financing here, this round, is small, meaning 20%, 15% of that $3 million number. Is that the kind of level you are talking about or are you talking more (multiple speakers)?

No, $3 million; we will raise approximately $3 million was what we hoped for.

Okay. And then, assuming the financing is completed, which I guess is a necessary step to fund it, otherwise you have to look elsewhere, the next hurdle post financing is what and when?

Then the next step is really -- we have tremendous expertise on the manufacturing of the generator. Really, what we are looking for is -- then, a very important part would be to involve other strategic players that could help guide us really from a user point of view. So we consider that to be real important, is to bring in some partners.

Okay. On the base business, I think we were all expecting sort of a tough quarter, but it struck me as particularly weak at the gross profit line. And I am just wondering if that is a function of fixed cost that you were not able to maybe cover. Or how do we think about the near breakeven at the gross profit line?

Yes. I think it is a combination. The revenue was a lot lower than we would expect. And, when Lou talks about a bounce back, we hope that it is going to be significant. So, to do $10 million in the quarter is very low. And, as you know, we have got -- we have certain fixed costs we cannot overcome.

We also are continuing to adjust to the large drop, obviously, in the Hanford gross profit because that was a very strong contract on the gross profit line. But, we think, with normal revenue getting back to the normal stream and the cost reductions we have put in place, we can get back to the kind of margins we usually look at, especially on the treatment side. And the service side is showing improvements in their margins as well. It is really a function of low revenue right now.

In terms of the second quarter, can you give us something a little more tangible that you are starting to see contracts come in or awarded? Is that in both areas? And, if so, what are we --

Yes. It is in both areas. Treatment is growing significantly and the service side. I made the comment, in fact, last night. I said I think we probably in the last month have won more contracts than we won all last year, especially on the service side. So I think we are seeing a fairly significant pickup in the service work and we are seeing a fairly significant pickup on the waste side.

For the quarter, we expect positive EBITDA and we are very close on the earnings side, for net earnings. So, depending upon how -- depending upon timing and when material comes in and how soon, which is always the uncertainty here, at the very least we will have a pretty good EBITDA. And, hopefully, even better than that, maybe even -- I think it is even a possibility of positive earnings.

Not to get ahead of view or ahead of what you are doing here, but does that mean treatment of the rate you're going today should be clearing $10 million a quarter run rate, at least for the next two quarters? And second, service, I don't know -- where are we at on that one? Because we have been declining, as you know, for the last several quarters.

I don't want to throw a number out, Al. But, treatment used to -- good quarters for treatment in the past were always $11 million, $12 million kind of numbers. So, as we all ramping back up to that sort of -- I keep trying to use the term normal, but to what we used to see, and we are seeing that kind of volume now, I would think $10 million is a fair number to at least anticipate.

And on the service side?

Service side is going to kind of ramp up a little less -- the ramp up is going to be a little flatter because the -- you know, as we have always said, these projects, you win them and then you have a month or two mobilization and sort of startup. So, not as quick an increase, but we will see the service side sort of -- it will probably be later part of second, and certainly in third it starts to move up.

Okay. My final question -- thanks for that color. My final question is, it sounded like you were surprised by the lack of receipts or the insignificant amount of receipts in the quarter. Is that fair? And, if so, have you seen April and May (multiple speakers) higher?

Our forecast the first quarter were better than -- and there were a series of events which -- DOE was going through some startups -- new startups on projects. Things have been closed down. They were starting things back up.

We thought we were going to get some material in, in the first quarter. And, because of issues they had, we saw delays. So yes, it was not as -- we were not expecting it quite as bad as it was. But, that is now all -- it has all turned around pretty rapidly now.

We get indicators all throughout the quarter, Al, and then if a major -- if a large shipment or two shipments gets delayed because of transportation reasons or other logistical reasons, it can have a pretty significant impact on our number. And that is really -- it wasn't so much a surprise, because it didn't come. It's just the timing side.

Well, I imagine weather had probably something to do with it. But is it something where you recover that amount plus you get the sort of normal Q2 that you were expecting? Or is it just being it is pushed out?

No. It should pile up. I mean, it is still there. It is not material we would lose. So, it is more a case of it being delayed and pushed into another quarter, and why we think second or third will even be better then.

Bill Nasgovitz, The Heartland.

It is good to hear that perhaps positive -- did we hear that correctly, positive EBITDA in Q2?

Yes.

And close to breakeven.

Close to breakeven. It could go either way, depending upon when they arrive

And, with this order pickup, do you expect to be profitable in the second half of the year? Are we going to be profitable in Q3 and Q4?

Yes. Our forecast, as we sit today, show profitability. Besides -- as Ben had mentioned, revenue will have -- of course, that has a dramatic impact because of -- we have also restructured how we operate and, in doing so, cut a significant amount of costs out of overhead, so that our breakeven has been pretty dramatically reduced moving forward.

To what level? What do we need per quarter to break even, generally speaking?

Well, the cost -- the changes Lou is talking about have occurred after Q1 and $600,000, $700,000 of fixed cost savings a quarter (multiple speakers) initiated. And that, along with getting back to a more normal gross margin, usually gets -- we should get us there.

Yes. The number on the treatment side is about $10 million; $10 million, we make money. And the service side is $5 million, $6 million range. But we will be close to that and the second quarter is close.

Okay. We are pushing $20 million in debt here. How do we stand with our bank, our creditors here? What is the status there?

Again, our bank is very supportive of us, as you saw at year-end when they provide waiver and relief on the covenants. We believe we will make our covenant in the second quarter and it will just get better after that. They gave us a covenant formula to allow us to ignore or to leave out the bad first quarter because we saw that coming.

So, it is a buildup of three, six, nine, and 12 months' fixed charge ratio, which is really the EBITDA number that has hurt us the past couple of times we have had the issues. But, they are very supportive of our Company and our business. We have been together more than 12 years and so we are comfortable, so long as things continue to improve, that we will be okay with them.

Okay. And then, lastly, Lou, you said something about significant opportunities here on the horizon; large potential. Could you give us a little bit more color in terms of what the target market might be and what type of contract size are we talking about, and what level of profitability might be possible?

Yes. The service business, we have seen -- when you look at Perma-Fix, you really have got two great niches, one being waste treatment and the second being health physics. And we have continued to focus and we have actually, in these reorganizations, have refocused the organization 100% on those two areas.

And the health physics business is -- just so everyone understands is -- it just -- anyone in nuclear have to have health physics. It is the guys that measure radiation. It is the guys that do the plans. It is the guys that understand the effects of radiation and what you can do with it, so, tremendous opportunity in the service side.

Everything -- we've talked in the past from one extreme, we do a lot of work on the natural occurring areas. We're one of the leaders in that; the norm waste. We are writing the regulations for fracking in Pennsylvania, for the fracking industry. We are helping them all the nuclear side. And we are working with a variety of generators that do fracking and helping them solve their problems, all the way to the other extreme in terms of our work in Canada.

We do a lot of work today with the Canadian nuclear industry, both from the waste treatment point of view and from the service side, providing health physics and the expertise there. So the service side of health physics is a mess. It is probably a $1 billion a year industry. And our growth there, we are still small, but the growth will continue with our group, since it is considered one of the best in the industry.

So how small are we? What are you anticipating doing in this area in 2014?

When you look at our service side, most of it is health physics.

Okay.

And, today, it is a $20 million, $25 million business when you look at the whole thing. Now, it has been larger in the past. Because of the cutbacks at DOE, we have refocused more on the commercial, more on the international, and continued to focus on DOE and Department of Defense.

But, I think you will see that group continue in the continuing to grow significantly, and that is where all our wins are coming from. We have had just a significant number of contract wins on the health physics side that are really breaking into a lot of new markets because of our reputation.

But any additional color in terms of what contract size you might be talking about?

Well, every day, as we sit here, we are winning the smaller ones, the couple million dollar ones. But we have either already bid on or are on in the process of bidding on contracts worth in the tens of millions for us. They may be a $100 million bid, but our part of it would be in the tens of millions. So there are some significant contracts we have bid on as we sit and are waiting to hear.

Who do we compete against? Who is winning those contracts or has in the past?

Well, the last year or two, we haven't lost very many. And I would have a hard time even sitting here saying which ones we have lost. It has been more delays and -- more delays.

So, but our competition on that side is usually either smaller firms or there is one or two large ones -- Canberra and that, that have health physics services. And -- but in certain areas, like on the natural occurring, we are probably one of the experts there right now. And that is where most of our wins have been in terms of natural occurring radioactive materials and the Corps of Engineers. So, we will continue to expect sort of growth in that area on the commercial side, which is good because it insulates us from the ups and down of government work.

Okay. And if we can (multiple speakers).

(multiple speakers) I hate to talk about specific ones we have bid on that -- because, one, there is so many and each one is semi-complicated because we are on teams with a variety of players.

Okay. Thank you.

(Operator Instructions). Ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the floor back over to Dr. Centofanti for closing comments.

Well, I would like to thank you all for participating. As I mentioned earlier, we are very encouraged by the outlook of the business. Things are beginning to turn around in the second quarter as we are seeing long-delayed contracts beginning to be awarded. We are seeing significant growth opportunities on the treatment side.

And we have dramatically cut fixed costs, both operating and SG&A, by streamlining the organization and believe that an increase in revenue, which we are seeing, will produce significant improvements in the bottom line. Also, we remain very excited about our new process to produce Tech-99. And I would like to thank you all again for your support and look forward to follow up in the next quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.