Perma-Fix Environmental Services Inc (PESI) 2017 Q2 法說會逐字稿

Greetings, and welcome to Perma-Fix Environmental Services Second Quarter 2017 conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Natalya Rudman. Thank you, and over to you.

Thank you so much. Good morning, everyone, and welcome to Perma-Fix Environmental Services Second Quarter 2017 Conference Call. On the call with us this morning are Dr. Lou Centofanti, CEO; Ben Naccarato, Chief Financial Officer; and Mark Duff, COO and Executive Vice President. The company issued a press release this morning containing second quarter 2017 financial results, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at (212) 671-1020. I'd also like to remind everyone that certain statements contained within this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and include certain non-GAAP financial measures. All statements on this conference call other than the statements of historical facts are forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which could cause actual results and performance of the company to differ materially from such statements. These risks and uncertainties are detailed in the company's filings with the U.S. Securities and Exchange Commission as well as this morning's press release. The company makes no commitment to disclose any revisions to forward-looking statements or any facts, events or circumstances after the date hereof that bear upon forward-looking statements. In addition, today's discussion will include references to non-GAAP measures. Perma-Fix believes that such information provides an additional measurement and consistent historical comparison of its performance. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is available in today's news release and our website.

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

Thank you, Natalya, and welcome, everyone. First, I'd like to say, while we've achieved another quarter of positive EBITDA -- adjusted EBITDA, we're obviously very disappointed with the revenue from our Service segment which reflects a temporary demobilization of a current project in May as well as the completion of a large commercial nuclear service project, which provided significant revenue in the second quarter of '16. It has taken us longer than expected to replace this revenue due to the timing in the projects. However, our project bidding is significant. Based on historical win rates, we're confident we'll see the benefits of these efforts later this year. Mark will also provide additional color on our service pipeline and new business opportunities in this segment later in the call.

On the other hand, revenue within the Treatment segment increased 21% to $9.6 million. And we anticipate continued improvement heading into the second half of the year. Within our Treatment segment, we benefited from higher waste volumes generated by government clients. We expect this trend to continue for the balance of '17, and we're encouraged by the improved budget for Waste treatment within the Department of Energy's office and Environmental Management. But with the office, we continue to be somewhat disappointed because of lack of appointments at the Department of Energy and slowness of appointments. We are also expanding our international commercial sales effort. At the same time, we're pursuing a variety of major initiatives related to new waste streams and look forward to discussing these opportunities further once we formally commence the work.

Turning to our P&L. We continue to carefully manage expenses and identify new areas of cost savings. We're on track to complete the closure of M&EC facility by January of '18, which we believe will save an estimated $4 million to $5 million in fixed costs annually. I'd also like to point out, as previously disclosed, that we freed up $5.9 million in cash with -- by replacing the closure policy at our Northwest Richland facility with a new bonding mechanism. With these funds, we were able to pay off our entire revolver -- revolving line of credit, secure a new bonding facility and increase our cash balance at quarter end.

Lastly, as we discussed on prior calls, our majority-owned medical subsidiary had secured a funding commitment from a potential investor for $10 million. Due to the fact the investor was unable to close the transaction within the required time frame, and that the no-shop provision ended, we provided notification to the investor our intent to seek funding from alternate sources. I'd like to be real clear, this was not due to the lack of interest by the investor, but rather his inability securing the full amount of funding for the definitive agreement in a timely manner. We're now in active discussions with other potential partners.

So to wrap up, we remain extremely encouraged by the outlook for both the Service and Treatment Segment and expect and anticipate improvement in both revenue and cash flow in the second half of '16.

At this point, I'd like to tuck it over to Mark Duff, our Executive VP and Head of Operations. And also point out that Mark is under a little stress today with his daughter, who -- had to rush her this morning to the hospital. She is having a baby. So that's going well and Mark will be talking from the hospital, all the good things that are coming here. Mark?

Thanks, Lou. I appreciate that. We do continue to implement a number of strategic initiatives to strengthen our offering in both the Waste treatment segment as well as the Nuclear Services segments. Within the Treatment segment, this is translated to increased waste receipts out of treatment plants reflected by the increase in our backlog and high productivity rates in the processing. At the same time, we're adding new treatment capabilities that will allow us to accept new waste streams, that will expand our addressable markets and help to further diversify our revenue streams. While revenue in the Nuclear Services segment was down in the second quarter, we've been able to identify and position ourselves for more opportunities going forward. This quarter, we submitted an additional 10 proposals with annual revenues (inaudible) exceeding $10 million in annual revenues. So as I mentioned on the last call, we do not expect to see the full benefit of these initiatives for a few quarters. And several larger -- several of the larger projects we're bidding have not yet been awarded. We feel strongly that we will get our Service segment back on the growth trajectory. We believe this segment has an enormous growth potential in the coming years. We also continue to expand our geographical reach, including several recent wins in Canada that will support establishing a new office with stronger customer support capabilities. These wins will further diversify our revenue in the coming quarters. Based upon our current pipeline, we remain confident that we'll see both top and bottom line improvement in the remainder of '17, and believe we're setting the stage for sustainable growth for the foreseeable future. I'll turn it over to Ben Naccarato, our CFO. Ben?

Thank you, Mark. I'll start with our income statement. Our total revenue from continuing operations for the quarter was $12.7 million compared to last year's second quarter of $14.8 million, a decrease of $2.1 million or 14.1%. Our Treatment segment revenue increased by $1.6 million or 20.6% because of increased volume in the -- of waste in the quarter. This increase, however, was offset by a drop in revenue from our Service segment of $3.7 million, about 54.8%. Our Service segment is project-based and it can vary depending on size and timing of projects. As Lou mentioned, we had a temporary halt of a project in the second quarter of '17, and add this to the completion of a pretty sizable project -- commercial project we had in 2016, and that's a big explanation for the drop. For the 6 months ended June 30, our total revenue sits at $25.4 million, which is up 2.3% from $24.8 million in the prior year. As with the quarter, the Treatment segment revenue has increased -- has exceeded prior year, while the service segment has been comparatively down.

Turning to our cost of sales. Our total cost of sales was $10.4 million compared to $13 million in the prior year. Our Treatment segment costs were relatively flat despite the increased revenue. The variable costs were up $338,000, which is consistent with the improved revenue, while our facility fixed costs were also up about $302,000, and this is due primarily to the accelerated depreciation at our M&EC facility, which we've scheduled for closure in January of '18. This increase was offset by a reduction of about $587,000 of prepaid fees we took in prior year in connection with the tangible impairment charges incurred at M&EC closure. Service segment costs were down about $2.7 million and this is consistent with the lower revenue. On the gross profit, for the quarter, we were at $2.4 million compared to $1.8 million in 2016. This is a 29.6% increase and it can be entirely attributed to the $1.6 million improvement in the Treatment segment, which, of course as I mentioned, is due to increased volume. Our Service segment gross profit was down $1.1 million due to the decrease in revenue. Year-to-date, our gross profit improved by $3.2 million, as both improved volume and price in the Treatment segment contributed to a $4.4 million improvement in Treatment segment gross profit, while the Service segment gross profit was down $1.2 million due to lower revenue. Our G&A costs for the quarter were $2.8 million, which is up from $2.4 million last year. Main explanation here is, in 2016, we resolved a longstanding accounts receivable matter that had been fully reserved, and so we recognized the $364,000 pickup. This pickup, which of course, does not repeat in 2017 makes up most of the variance in our G&A. And this explanation also pertains on the year-to-date basis where we have G&A of about $253,000 higher for the 6 months ended June 30. Our loss from continuing operations for the quarter was $1.2 million compared to a loss of $8.1 million last year. Included in this year's loss are $550,000 and $416,000 related to our Medical segment for Q2 and '17 and '16, respectively. Our Medical segment wrote off $280,000 -- $289,000, excuse me, of legal fees in the quarter as a result of the decision made to notify a potential investor of our intention to seek funding from alternative sources. In addition, 2016 results included a onetime impairment charge and asset writeoff charge from our M&EC closure, which had an after-tax impact of approximately $7.5 million. Our loss applicable to common shareholders was $1.2 million compared to last year's loss of -- net loss of $8.2 million. Our total loss per share for the quarter is $0.10, and our loss per share in the prior year was $0.71. Our adjusted EBITDA from continuing operations for the quarter, as defined in this morning's press release, was $586,000 compared to $824,000 last year. For the 6 months ended June 30, our adjusted EBITDA is $1.4 million compared to an adjusted EBITDA loss of $1.5 million in our prior year. That's a $2.9 million improvement.

I'll next turn to the balance sheet. As it compares to December 31 of '16, our cash balance improved modestly as a result of the closure bond transit, which allowed the company to free up $5.9 million of cash and was used to secure alternative bonding and pay down our long-term debt. Intangibles and other assets were down $6.4 million, primarily reflecting the closure bond transition of $5.9 million and the reclassification of a note receivable from long-term to current. Our waste backlog was $6.5 million, which is up from year-end of $5.3 million, but as important it's significantly up from the $3.6 million in June of 2016. Long-term liabilities were down $5.1 million as a result of full payment payoff of our revolver and the reclassification of our closure reserve at M&EC from long-term to current. Our current debt is $1.2 million, which is consistent with year-end and lower than prior year by about $261,000. Our total debt at the quarter end was $4.6 million, which is all due to our primary lender, and the entire $4.6 million represents our term loan balance and reflects the 0 balance in our revolver.

Finally, I'll summarize cash flow activity for the quarter. Our cash used by continuing activities was $744,000. Our cash used by dis ops was $284,000. Our cash provided by investing activities was $5.8 million, of which $116,000 was capital spending. And our cash used for financing was $4.4 million, of which $609,000 was used to pay our monthly term loans and $3.8 million was used to pay off our revolver balance. Operator, I'll now turn the call over to questions.

(Operator Instructions) The first question is from Sam Rebotsky from SER Asset Management.

Lou, as far as the inability to finance to close the transaction for the Medical area, are we holding back spending money? Or what's been happening with that piece of the business?

We have dramatically dropped the spending at Medical. We're continuing to work on advancing the technology through our own development. And we have some other options we're looking at the moment for people that are very interested in assisting us. So at this stage, yes, we've dramatically dropped funding -- spending, and although the development is continuing of the work in our -- with our own facilities and operations. So -- and hopefully in the near future, I'll have more to say about. We have a lot -- we still have a lot of interest in the technology from a variety of people, strategics and funding sources.

But the development -- in other words, we've slowed the development stage because of lack of funding? Or we let -- in other words, is it postponing that pace?

Yes. Yes. We have -- we're delaying a lot of our outside work. We still have the grant that we're using to fund some work, and we also have -- still having progress going on in our own labs at a very low cost.

And as far as your Nuclear business, the government is not letting out any contracts or...

No. Actually, what we're seeing is -- we're seeing a lot of potential work coming. And as I said, the Treatment segment is continuing to do well. And Mark, you might want to pick up there on the service side?

Sure. Yes. We have a -- we've won a few this quarter. We won a nice contract in Kansas City that has just recently mobilized. And as Lou and Ben both mentioned, we had a temporary demobilization of one of our larger projects in May. And that is remobilizing here in the next week or two. So things are picking up. They're making awards. But we are still waiting for a number of bids -- several bids that will have an impact on the company in the future.

And the significant technology that you've been working on with the government to treat waste in a revolutionary way, how are you proceeding with that?

Again, that's probably the most affected by the appointees. But I could tell you that we are still extremely focused on it. And I'll be honest with you, I've never been in a project that could have more impact on this country than what we're doing. So still very optimistic. It is still somewhat slowed down, but still very positive on it, and we see a tremendous potential in it.

And the fact -- okay. Is there any ability, do you see any profitability? When do you see profitability the way you've been functioning and the way the business is operating?

Well, I think, with the -- with our Medical costs and others, it's hard to predict right now. And we're not quite ready to do guidance with the uncertainty on the service side. And so that -- but again, we see positive EBITDA. We see things improving, both on the revenue side and on the EBITDA side, and we'll see how the quarter ends in terms of profitability. But I expect to be much more positive cash flow and the revenue to continue to grow.

(Operator Instructions) Next question is from [Anthony Marchese], a private investor.

Two questions. One, I noticed recently, I guess, in the last (inaudible) to South Carolina is in the DOE. Are you involved in all the projects with cleanup in South Carolina at all?

We -- the Savannah River plant is one of our main customers. We see that on and off depending upon while they're working. Now I think the loss was -- was that more with the MOX plant or was that...

Yes.

Yes. That's more a construction project. And it's the one that [in the wet plants] in Hanford that are consuming a very large part of the DOE budget right now for cleanup.

But, I guess what I'm -- I guess, I'm questioning, is South Carolina's action potentially positive for Perma-Fix?

Unclear. That's -- right now, Congress is very focused on continuing the MOX plant. And for the Nuclear business I thought that was important. But in the long run, so I'm not sure. It's really kind of neutral for us at the moment. I don't think it has much impact at all.

And I guess the second question is, has there been any M&A activity in your sector? I know in the past there has been -- you know, there was some consolidation in the business. If you could just address that? Is there anything going on in the sector?

Yes, there continues to be extensive -- EnergySolutions acquisition of WCS was halted. The Justice Department won their lawsuit against the merger. So you have WCS today on the market. So that's probably one of the big things. The second is, you have seen acquisitions over the last year, in terms of Veolia buying Kurion. So we did see activity going on as we're headed today.

I guess the question is, are you a potential acquirer of businesses? Or at this point, do you feel that you have enough on your plate to grow the company organically?

Well, we're always interested in what's going on, on the M&A side. And -- but at this point, our main focus is very much internal in terms of growing our base business, especially the Service side. And the introduction of several new technologies, one which we're talking about in terms of a new option to treat radioactive waste waters.

Okay. Final question. When you mentioned earlier that this particular technology is potentially going to be employed by the DOE, could you be a little more specific in terms of how the lack of appointments within the DOE affects what you're doing [with your particular technology?]

While, I think -- the main way, of course, the lack of appointments affect us is that it's hard for the department to make major decisions without guidance when you have major positions open. So it basically coasts along on where it was and tries not to make major changes. So today, the department has several appointments they've proposed, 1 or 2 have been approved, but it's really been a very hard time making them. In terms of our system is the main market we're really going after is not -- is on the waterside is more commercial and more the commercial waters.

So at this point without getting specific because I know that they don't want you discussing it. At this point, are you finished, so to speak, with what you're supposed to be demonstrating to the government or is there potentially more to do?

No. We've got a lot more to do on some of our newer technologies and what we're doing. No, there's a lot of activity going on the government's side in terms of with some of our technologies.

Ladies and gentlemen, that was the last question. I now hand the conference over to Lou Centofanti for closing comments. Over to you.

I'd like to thank everyone for participating in our second quarter conference call. As I mentioned earlier, we achieved another quarter of positive EBITDA. The revenue within our Treatment segment increased 21% to $9.6 million. This growth was offset by a decline in Service segment due to completion of a large nuclear service project. However, we're fully confident we'll replace this lost revenue and return to growth in our Service segment shortly. Heading into the third quarter and balance '17, we anticipate growth in revenue and improved profitability. We appreciate everybody's continued support. We look forward to providing additional updates in the near future. Thank you.

Thank you very much. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.