Perma-Fix Environmental Services - Earnings Call - Q1 2018

Transcript

Speaker 0

Greetings, everyone, and welcome to the Perma Fix Environmental First Quarter twenty eighteen and Business Update Conference Call. At this time, all participants will be in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Waldman with Crexendo Communications.

Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to Permafix Environmental Services first quarter conference call. On the call with us this morning are Mark Duff, CEO Doctor. Lou Senifani, Executive Vice President of Strategic Initiatives and Ben Naccaratto, Chief Financial Officer. The company issued a press release this morning containing first quarter twenty eighteen 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 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 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 on our website.

I'd now like to turn the call over to Mark Duff. Please go ahead,

Speaker 2

Thanks David. I'm happy to report we achieved not only positive EBITDA, but also positive net income for the quarter. This reflects the success of our efforts to streamline operations while broadening our market base. Gross profit increased to $3,300,000 versus $2,700,000 for the 2017 and gross margins increased by four eighty basis points to 26.2%. And even though revenue was relatively flat over 2017, our backlog was up at the end of the first quarter, which provides us good visibility heading into the second quarter and the balance of the year.

First from a macro perspective, we're encouraged by the improved budget within the Department of Energy, our primary client. The recently enacted budget provides $7,100,000,000 for DOE's environmental management activities, which is $7.00 $6,000,000 above the $6,400,000,000 enacted for 2017. This is an important element due to the high fixed expenses within environmental management. Significant funding increases normally translate to increased incremental DOE spending on non labor projects such as waste treatment activities. For this reason, we remain optimistic that Perma Fix could realize increased opportunities for waste treatment growth in the latter half of twenty eighteen as our clients will need to spend this money to ensure earned value and secure budgets similar budgets for 2019.

We've also seen a pickup amongst our defense clients that are beginning to plan and implement remediation projects, which will provide an increase in nuclear services opportunities in the third quarter and fourth quarter, while also providing waste treatment growth as well. Also within the Treatment Segment, construction activities are continuing at our Gainesville, Florida facility to accept and treat radioactive contaminated water and additional commercial waste streams beginning in late as well as expansion programs in the hazardous waste processing markets geographically to include recent contract wins in the Atlanta Metro Area for household hazardous waste removal and disposition. We're making progress with the installation of our GeoMelt system that is being installed on our Permafix Northwest facility through our partnership with Veolia Nuclear Solutions. Upon completion of construction, installation and start up for testing, the GeoMelt vitrification system will be used to treat waste drums containing sodium residual waste. This vitrification capability will provide the capacity to treat non bulk sodium waste that has otherwise represented a waste stream with no path for disposition.

This type of partnership with Veolia will provide an attractive niche market for Perma Fix to leverage our existing permitted facilities to deploy new technologies. The market for treatment of reactive waste such as sodium, we estimate to exceed about $5,000,000 a year annually based on inventories that we know exist at various government facilities. We continue to look outside The U. S. As well and are seeing a number of new international opportunities that should contribute to our growth, especially waste streams that are very difficult to treat.

Once treated in our U. S.-based facilities, we will return the waste in a stable form for final disposal in the countries of origin. We are currently bidding on initiatives in The U. K, United Kingdom, Mexico and Italy with awards anticipated in the fourth quarter along with Canada which we should begin shipping waste to our Northwest facility in the second quarter. Within the Services segment, this was an active quarter for project bids including 10 new proposal submittals, which may result in an increase in fuel projects this summer.

It's taken a while to get the services segment back on track, especially with the number of project bids delayed, but I remain confident that we're on the right long term trajectory and our management team continues to focus on increasing our win rates. A few areas worth highlighting are the continued growth in Canada, including our Radiological Remediation Services, as well as new opportunities in the oil and gas markets in Western Pennsylvania, Ohio and West Virginia that have allowed us to apply our unique capabilities and growing demand for the management of natural occurring radiological material waste also known as NORM waste. Within the NORM markets, we are completing several new partnerships with firms to expand our services within the region and to service more clients overall. We have several important procurements underway and are still awaiting awards, which should contribute to revenue to our Services segment within the next few quarters and provide the stability in revenue we need to sustain our growth. We are heavily focused on aligning with strategic companies to support the large Department of Energy operating contracts at the Oak Ridge facilities in Tennessee and Hanford Washington as well, which are entering into the procurement processes within the next few quarters.

Perma Fix offers these larger firms unique value to the teams in providing innovative waste management solutions to our fixed facilities that directly translate the cost savings within the project baseline budgets and schedules as defined in their proposals. On one final note, let me briefly touch on the Medical subsidiary where we continue to trim costs. In fact, our total expenses for the quarter were down substantially versus the same time last year, not for any lack of enthusiasm, but rather we shifted this strategy to focus on an international partnering strategy, which where we can work with partners that are much better equipped to develop a medical product and advance it through the appropriate regulatory bodies. Initially, we're focusing on small markets in Europe and elsewhere where the cost and regulatory hurdles are much lower. This also allows us to show proof of concept with minimal capital expenditures at the subsidiary level.

This strategy will allow us to advance the development of our processes without the need to raise near term capital at the subsidiary level and therefore dilute Perma Fix interest in the subsidiary. We are closely we're working closely with our partners in Canada and Italy that have initiated indicated a willingness to fund development and regulatory costs in their respective markets. We can't provide a specific breakdown of the costs they've incurred, but suffice to say they are running tests, developing generators and a host of other activities that give us confidence that they are committed to the process. Another advantage to this pathway is that we can advance the technology and accumulate additional data that will help us streamline the path to regulatory approval in The U. S.

Once we hit certain milestones these markets within these markets, can either pursue The U. S. Market on own or negotiate a partnership on much better terms. So to wrap up, our financials are improving. We're seeing strong improvements in waste receipts and backlog.

We've trimmed our expenses and we see opportunities on the horizon that could be quite significant and potentially transform the business when they materialize. Given our reduced overhead and scalable operations, we believe further revenue growth has the potential to significantly enhance our profitability. On that note, I'll turn it over to Ben, who will discuss the financial results in more detail. Ben?

Speaker 3

Thank you, Mark. We began 2018 with relatively flat overall revenue in the first quarter, but we did see improvements over the prior year in our gross profit, our gross margin, net income and our cash flow from operations. Our total revenue from continuing operations for the first quarter was $12,700,000 consistent with 12,700,000.0 last year. Our Services segment revenue increased by $1,000,000 or 38%, but this was offset by a reduction in our Treatment segment of $1,100,000 or 11%. The decrease in the Treatment segment was primarily due to the closure of our M and EC facility, which in prior year recognized revenue of $3,400,000 Our cost of sales was down to $9,300,000 which was down from the prior year cost of 10,000,000 The reduction in our depreciation expense made up most of this improvement as most of the assets at our M and EC facility were written off in the 2017 accounting for a reduction of approximately $768,000 Our gross profit for the quarter increased from $2,700,000 in 2017 to 3,300,000.0 this year in the first quarter, an increase of $602,000 or 22%.

Our Service segment gross profit was up $5.00 9,000,000 which was due to the increased revenue and our Treatment segment gross profit improved by $93,000 Our SG and A for the quarter was $2,800,000 which was down from $2,900,000 last year, primarily the result of lower payroll related costs. We had income from continuing operations for the quarter of $253,000 compared to a loss of $675,000 last year, an improvement of 928,000 Along with this increase in our along with the increase in our gross profit, we also saw reductions in our administrative spending, our research spending on our Medical segment and lower interest from our diminishing debt. We had income applicable to common shareholders of $136,000 compared to last year's net loss of 7 and $27,000 and we had earnings per share of $01 compared to a loss per share last year of $06 Our adjusted EBITDA from continuing operations for the quarter as we defined in this morning's press release was $789,000 compared to $835 last year. Turning to our balance sheet compared to twelvethirty one. Our balance our cash balance at the end of the first quarter was $2,900,000 which was up from $1,100,000 at year end reflecting improved collections of our receivables.

We had a $3,200,000 reduction in our receivables, which reflected our improvement in our annual DSO, which fell from fifty five days down to thirty four days. Our unearned revenue increased approximately $309,000 with our backlog of waste increasing slightly from $7,700,000 up to $7,900,000 at the end of this quarter. And comparatively our backlog at the end of 2017 was $5,900,000 Our current closure accrual related to our M and EC facility was down $927,000 representing spending on the closure and having a net balance of $1,900,000 at the end of the quarter. Our total debt at the end of the quarter was $3,600,000 to our credit facility P and C Bank. Finally, I'll summarize our cash flow activity in the first quarter.

Our cash provided from continuing operations was 2,600,000.0 Our cash used by discontinued operations was $181,000 Our cash used for investing in continuing operations was $290,000 of which $248,000 was cap spending. And our cash used for financing was $304,000 which represents our monthly payments on our term loan. With that operator, I'll now turn the call over to questions.

Speaker 0

Thank you. We'll now be conducting the question and answer session. Our first question comes from the line of Tristan Tsa with MTB Asset. Please proceed with

Speaker 3

Hey guys. I noticed on a government tracking website that there were two new TBI awards to Perma Fix. I assume that we can assume that these indicate that Phase two of the tank test is underway?

Speaker 2

Yes, Tristan. The project is progressing and those are indeed have been awarded, which is allowing us to move forward with the next phase. Unfortunately, Tristan, we are not at liberty to provide any details in regards to where that's going at this point other than the next phase of the project is progressing.

Speaker 0

Okay.

Speaker 3

That was all I had. Thanks guys.

Speaker 1

All right.

Speaker 2

Thanks, Tristan.

Speaker 0

Thank you. Thank you. Our next question will be coming from the line of Bill Naskowitz with Heartland Funds. Please proceed with your question.

Speaker 4

Yes. Hi. Good morning, guys. Hi, Bill. Hey, could you talk a little bit about Mark, mentioned international.

What level of sales do you estimate that we'll be doing in Canada, for example? And what are can you enlighten us a little bit more in terms of opportunities outside of Canada?

Speaker 2

Yes. Canada, Bill, is largely probably more weighted on the services side of the house. We're increasing our staffing up in Canada. We opened up a new office outside Chalk River facility and that's growing very well. We continue to have to see a lot of bidding opportunities in the Port Hope area as well as other areas in Canada.

It is a little slower than we'd like, but we are receiving some waste there as I mentioned in the second quarter. As far as the other ones go, particularly Italy, there's a large project we've been working on for quite some time. Procurement process in Italy are very, very slow, but the projects are quite large. And most of the projects are between 20,000,000 and $50,000,000 overall over a number of years. So they're larger projects.

And it takes a long time to get through the procurements because what they do is they down select down to two companies and then down to one and it just takes a long time to do the process. So we're anticipating the announcement of a large Italian project by December. We have another waste stream out of Italy that will be quite large as well. I'd like be speculating on value that we also expect to see this year and we expect to see some waste from The U. K.

In the next two quarters.

Speaker 4

And we have never been in The U. K. Before? Is that something new?

Speaker 2

No. We received waste from The U. K. We actually have an office over there with some staff. And we've been we've had contracts in the Newcastle area service contracts for a long time and have done a lot of projects over there in the past.

It's gotten small over the years. But like I said, we've got the waste. We'll treat them up at Northwest and then ship the residues back for disposal over there. So they don't have the robust treatment capabilities in Europe that we have here. So once you get through the import licensing and all that goes along with that, it's a very high value for us to be able to treat it.

Unfortunately transportation costs can be a little expensive. When you don't have the capability in U. K. Or anywhere in Europe, it provides a lot of value to our clients being able to ship it here and ship it back in a much smaller quantity.

Speaker 4

Again, just turning back to Canada then. So what level of sales do you anticipate we'll be running at in that area this year?

Speaker 2

Yes. This year, we'll probably be right around $2,000,000 annualized and we've anticipated doubling by this time next year. And we're adding a couple of staff every month. And what that would which seems very small, Bill, and it really is overall in the scheme of things. But what it does is it puts us in a position to win larger jobs.

And once you start building the capacity and having the technical expertise and the relationships and the trust, then you're in a position to win larger projects in the 5,000,000 to $10,000,000 range. So it's really kind of a slower process. But we really anticipate given where Canada is in their cleanup cycle, which is arguably ten or twenty years behind The U. S. They are well funded.

They're moving. They're making progress. And they have money set aside significant dollars set aside for large remediation projects both at Chalk River and in Port Hope that we see as very strategic for us.

Speaker 4

And lastly, I missed the backlog number. What is the backlog today versus a year ago?

Speaker 3

7.9% today, 5.9% a year ago.

Speaker 4

Okay. Thank you.

Speaker 2

Thanks, Bill.

Speaker 0

Our next question comes from the line of Joe Brown. Congratulations on your profitability your net profit. I was curious when was the last time that the company had a net profit? Do you remember historically?

Speaker 3

So it was probably well, we certainly were fourth quarter the last quarter was profit for a couple of reasons. Prior to that 2016. The last two quarters have been profitable. Last two Quarters,

Speaker 0

And I wanted to ask you, it sounded like you said that you have about $3,000,000 in cash, is it something like that?

Speaker 3

Yes. We closed the quarter at $2,900,000 yes.

Speaker 0

Okay. So and I would assume that this quarter given your backlogs and the fact that you were profitable last quarter, I assume you're going to be profitable again this year I'm sorry, the second quarter. And so it sounds like you're building up some cash. I'm just wondering what are your priorities? What would you be doing with that?

Would you pay off debt? And your debt isn't that much, but still interest rates are going up. And I'm just curious what are your priorities as you accumulate cash, what are your priorities in terms of how to spend it? Or you just want to hang on to your cash?

Speaker 3

Well, short term, we have the liability that comes with the closure at the M and EC plant. And that's why we have a rather large current closure liability on the books. So in the short term that's what we would do with the cash. After that, we've got a pretty low and manageable debt. So I don't think there's a high priority to necessarily pay that off.

So investing reinvesting in capital or revenue generating projects would probably be the priority.

Speaker 0

And which ones do you think are would be the would get priority as far as capital reinvestment or spending projects? Would it be expanding in Canada? Or how which of those projects would get the priorities?

Speaker 2

Joe, as you may recall from the last quarter Telecom, we talked about the construction projects are ongoing at each of our facilities.

Speaker 0

That's right.

Speaker 2

Yes. So to answer your question, we will be looking to expand the construction at our Oak Ridge facility to deploy a couple of new technologies or at least additional technologies as well as we have several in mind for the Northwest facility, which would also expand our treatment capacity there as well. So both those facilities have backlogs of projects that we would fund with additional cash.

Speaker 0

Okay. Good. All right. That's about all. That's all my questions.

Thank you. Thank you. Our next question is coming from the line of Bill Naskowitz with Heartland Funds. Please proceed with your question.

Speaker 4

Yes. Mark outside of the tank potential opportunity, what are you most excited about in terms of growth and profitability for Perma Fix?

Speaker 2

I appreciate that question, Bill. I have to say that probably the most exciting opportunities we're seeing is on the large rebids of some of the DOE contracts. I think that Permavix has done a great job in the last few quarters of identifying how our fixed facilities can benefit a large business team going after these large bids as you know in the billions of dollars over five year kind of periods. And the facilities we have are so strategically located where these procurements are occurring both in Oak Ridge and Hanford that they offer very significant value in commercial waste treatment as well as solving technical issues at those sites that are in those procurement opportunities. So I think very strategically aligned with the scopes of work that are coming out and I see us being able to provide very important roles on those teams in the next couple of quarters.

So that's probably the next thing behind TBI that I think really look like big market movers for us.

Speaker 4

Okay. Thank you.

Speaker 0

Thank you. At this time, I will turn the floor back to Mark Duff for closing remarks.

Speaker 2

Great. Thank you. I'd like to thank everyone for participating in our first quarter conference call. As I mentioned earlier, oyster seats were up. Backlog continues to grow within the Treatment Segment.

Our recent initiatives to increase efficiency at our treatment facilities coupled with reduced costs from closure at the M and EC facility resulted in an improvement in both gross profit and an increase in gross margin of more than four eighty basis points. We generated $789,000 of adjusted EBITDA and achieved positive net income attributable to common shareholders. We're excited about the prospects moving forward including the improved federal budgets and new expansion opportunities at our treatment facilities and continued diversification of our waste streams. We look forward to updating you again next quarter. Thank you very much.