Perma-Fix Environmental Services - Earnings Call - Q2 2016

Transcript

Speaker 0

Greetings and welcome to the Perma Fix Environmental Second Quarter twenty sixteen Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. I would now like to turn the conference over to your host, Natalia Budman. Please go ahead.

Speaker 1

Thank you, Shay. Good morning, everyone, and welcome to Permafix Environmental Services Second Quarter twenty sixteen Conference Call. On the call with us this morning are Doctor. Lou Cintafanti, Chief Executive Officer Ben Naccarato, Chief Financial Officer and Mark Duff, Executive Vice President. The company issued a press release this morning containing second quarter twenty sixteen 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 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 are subject to known and unknown risks, uncertainties and other factors, which could cause actual results and performances 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. 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 Doctor. Lou Santokwani. Please go ahead, Lou.

Speaker 2

Thank you, Natalia, and welcome, everyone. First of all, I think we should apologize for the late filings, but there were two major events that caused this. One was the requirement to get a waiver from our lenders. We required this waiver due to the fact we're unable to meet certain covenants in our credit facility. We have received assurances we will receive this waiver as we have in the past.

But like with any large organizations, banks have procedures they go through and processes that take time that we have no control over. The second, the other event was our decision to with the planned shutdown of our M and EC facility. We needed to complete the plan, conduct evaluation related to the impairment, which took time. Now I'd like to also turn to the results, which were disappointing. The numbers were weaker than we had hoped.

Once again, we experienced delays related to the timing of shipments. Despite these delays, it is important to note we did achieve positive adjusted EBITDA for the quarter. It's also important to point out these projects were not canceled but delayed because of shipping issues. We still expect a strong second half of the year. Our only concern is our biggest challenge given the influx of shipments in the second half is how quickly we will be able to treat the waste and how much we'll be able to recognize in 2016.

As a result of these concerns, we are revising our guidance downward and currently anticipate an adjusted EBITDA in the range of 3,000,000 to $4,000,000 With these challenges, they do mask some of the very positive developments going on in the company. First, as we looked at all aspects of our business to identify areas for cost savings with the expiration of our lease in our M and EC facility in Oak Ridge scheduled for January 18, we have decided to shut down the facility. We believe shutting down the facility results in significant cost savings. In fact, M and EC was also the only plant that we do not own. We are relocating certain equipment and shifting specialized capabilities from our M and EC facility to our other facilities where we believe we have sufficient capacity and can easily reroute waste streams with minimal impact to revenue or disruption to our customers.

I think it's important to point out that with these three owned facilities, we have very broad permits, licenses that will allow us to expand as much as we need to in this business. During the transition period, we will continue to process waste gradually wind down the facility over the next eighteen months with a scheduled end date of January 2018. As a result of this decision, which should be very positive in the long run as we should save significant fixed cost. Our second quarter financial results reflect certain non cash tangible and intangible asset impairment losses and other charges, which Ben will discuss in more detail. On the last call, I had mentioned that the company is on track for the most transformative event in the company's history, which is commencing treatment of high level waste.

Specifically, we received an IDIQ contract from the DOE for up to $8,600,000 to demonstrate the treatment of high level waste by the end of the year. Very excited to tell you it's on schedule. And as many of you know, I'm very limited in what I can say, but this project being our first major forte in high level waste from the major priority for our customer. In fact, what we're seeing is that it's we're getting tremendous support at the various highest levels of government on what we're doing in this project. Project is progressing as expected and is on track with our customers and our expectation is both operationally and from timing standpoint to be able to complete the initial demonstration by the end of the year.

Turning now to the Service segment, we saw growth in profitability in this segment and are excited by the number of projects we're bidding on, which is a great introduction for me to introduce to you our new Executive VP, Mark Duff. I'm very excited and pleased to present Mark as our Executive VP. Mark brings thirty years of management and technical expertise in the Department of Energy, Department of Defense and in the small company management area. Most recently, he was responsible for the successful completion of over 70 performance based projects at Paducah Gaseous diffusion plant, which was a five year project with a total value of $458,000,000 He was also senior manager supporting Babcock and Wilcox where he oversaw implementation American Recovery and Reinvestment Act at Department of Energy's Y-twelve facility with a $245,000,000 budget for new cleanup projects completed over a two year period. Mark began with Perma Fix in June as immediately focused on driving top line growth, providing leadership to our business development effort to expand and generally grow revenue.

And I'm real pleased in the short time Mark has been here, we've already seen the positive results of his efforts. Turning now to the Medical side of our business, our majority owned subsidiary Perma Fix Medical, we're in active discussions with a number of potential investors, partners, distributors and customers. We continue to make progress preparing for May for submission to the U. S. FDA.

Since we're focusing on the regulatory filings, we have not had any public announcements. Nevertheless, we are making steady progress in those important fronts. We are active in in active discussions with potential investors, partners, distributors and customers. Based from the feedback from the industry, we strongly believe our new process to produce technetium-ninety nine has the potential to transform the radiopharmaceutical industry and we look forward to providing additional updates in the future. To wrap up, we are very disappointed by the continued delays we experienced.

However, we believe we're on a strong growth trajectory with some very exciting opportunities on the horizon including the high level waste project. In the meantime, we'll continue to look for ways to grow the business while streamlining operations. We believe the shutdown of our MNEC facility will contribute significant fixed cost savings. We anticipate a strong second half of the year and look forward to providing additional updates. Now, I'm very excited again to turn over the call to Mark Duff, who will provide a quick introduction and then Ben will go into more details on the numbers.

And then we'll be back to answer questions. Mark, welcome on board. Thanks, Lou. I appreciate that. I am really excited to join Perma Fix at a time in the company's history that has such great opportunity for growth and expansion.

Before taking this position, personally conducted an exhaustive interview review of all our current operations. I assessed our brand and the industry and reputation and surveyed our potential for growth opportunities. And I strongly believe this trip has a tremendous opportunity to grow the services segment as the market is looking for leadership in both remediation in the field sector as well as the ability to reduce cost to projects through waste treatment technology. And with the integration of both our services and waste treatment segments into our business development strategy, Perma Fix can increase market share within the government and the commercial sectors while providing increased value to our customers. Perma Fix has an excellent track record and an impeccable reputation in the industry for delivering value and pollution to very complex environmental waste management problems.

And with a more focused and integrated approach to our business development, I'm very confident we can rapidly grow the services side of business. Within the segment, Perma Fix has unique opportunity with our existing facilities and associated permits and technologies currently in place to treat high level waste in addition to what we've done from legacy fashion with low level mixed waste in our business. Given the fixed cost nature of the business, we can rapidly grow margins and profitability by driving top line growth and begin to solve high level waste problems as we have for low level waste for so many years. I'm 100% confident we can unlock this potential. Look forward to meeting the investors and answering any questions you may have going forward.

With that, I'll turn it over to Ben. Thank you, Mark. We'll begin with revenue. Our total revenue from continuing operations was in the second quarter was $14,800,000 compared to last year's second quarter of $16,300,000 a decrease of $1,500,000 or 9.4%. This decrease in revenue was a result of the shortfalls as we discussed in our revenue in the Treatment Segment of $3,100,000 where the timing delays of expected waste shipments resulted in lower volumes at our plant.

The shortfall, however, was offset by increases at our service segment of $1,600,000 as we saw increased event based project work. On cost of sales, we were $13,000,000 in the second quarter compared to $12,300,000 in the prior year. Our Treatment Segment costs included a one time write off of prepaid regulatory expenses related to a BTD treatment asset, which we are decommissioning as part of the pending shutdown of our M and EC Oak Ridge facility. Excluding this expense, our treatment costs were $936,000 below prior year as various expenses related to lower volume and lower fixed expenses at the plant of approximately 428,000 accounted for the difference. Our cost of sales in the service segment were up $1,000,000 compared to prior year.

Incremental project related expenses increased as a result of the increased project work, while our fixed overhead expense remained relatively flat. Our gross profit for the quarter was $1,800,000 compared to $4,000,000 in 2015. Excluding the asset write off, gross profit in the Treatment Segment decreased by 2,200,000 compared to prior year. Lower revenue was the main reason for the reduced gross profit, although revenue mix minimally added to this variance. Our reduction in facility expenses partially offset this variance.

In the Service segment, gross profit increased $537,000 both from the increased revenue and a more profitable project mix. Our G and A costs for the quarter were $2,400,000 compared to $2,900,000 last year, a decrease of $500,000 Lower payroll expenses and the recovery of a long time bad debt expense were the primary reasons for the improvement, and these numbers were offset partially by increased costs related to bid and disposal. Loss from continuing operations for the quarter of the core taxes was $11,300,000 compared to $443,000 last year. Most of the current year loss was due to the 10,700,000.0 expenses related to the impairment of tangible, intangible and prepaid assets related to the decision to shut down the MNEC Oak Ridge facility and also the $415,000 related to our Medical Isotope segment. Our net loss applicable to common shareholders was $8,200,000 compared to a net loss of $154,000 last year.

M and EC shutdown costs accounted for $7,500,000 of this loss and our medical isotope segment again accounted for $416,000 Within the M and EC costs, there was a tax benefit of 3,200,000.0 resulting from the impairment losses from the permits. Our loss per share was $0.71 compared to last year's loss per share of $01 Our adjusted EBITDA from continuing operations for the quarter as defined in this morning's press release was $824,000 compared to $2,000,000 last year. Some items on the balance sheet. Our cash was down 1,100,000.0 primarily from debt maintenance payments totaling $1,600,000 Our other receivables were down $1,600,000 primarily from the amortization of prepaid expenses and the write off of the prepaid expense related to the M and EC assets. Our impairment of our M and EC tangible and intangible assets of course explains the drop in property and intangible assets.

Our waste backlog for the quarter was 3,600,000.0 compared to $4,700,000 at year end and $5,700,000 a year ago. And our current debt excluding our debt assurance costs were $1,500,000 down $1,000,000 from year end and lower than the prior year's second quarter of $2,300,000 And our total debt at quarter end was $10,900,000 10,700,000.0 of which is from our lender PNC Bank and we had a small amount left from our shareholder loan, which has since been paid off. Finally, cash flow activity year to date as of the second quarter, our cash used by continuing operations was $1,500,000 Our cash used by discontinued operations was $458,000 Our cash used for investing was $71,000 of which 28,000 was for capital spending. Cash provided by investing activities from discontinued ops was $46,000 And our cash provided from financing was 962,000 Finally, I'll address one more time the notification of filing late filing for our 10 Q. The covenant in our credit facility requires that we maintain a 1.15 to one ratio on our fixed charge ratio.

We failed to achieve this in the second quarter, primarily due to the aforementioned delays impacting our top line revenue. We are in discussions and expect to receive a waiver from our lender. Unfortunately, the bank was unable to do this timely and required us to file the extension. We do expect to receive the waiver at which time we will file our Form 10 Q. Now, I'll turn the call back over to Luke.

Once again, I'd like to thank everybody for participating in our second quarter conference call. We look forward to a strong second half of the year. We anticipate solid growth in treatment and services and we're extremely excited about the outlook for our high level waste project. Pleased to welcome Mark Duff, who believe he brings a strong skill set and significantly expands the depth of our senior management team, especially on the sales and business development side. We continue to advance our process to produce TEC-ninety nine and remain on track to submit a filing with U.

S. FDA. We think the future has never been brighter and we anticipate this continued support and patience of our shareholders. We look forward to providing additional updates in the near future and thank you all. With that, we can now open the call to questions.

Speaker 0

Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from Walter Schenker from MAZ Partners.

Speaker 3

Can we just spend a little bit more time on the closing of the Oak Ridge facility. You lost your lease because it went to someone else. You lost the lease because you didn't want to pay to renew it because that was your largest facility. It had broad ranges of capabilities from PCBs. It was supposed to benefit a number of years ago when the government closed down its incinerator.

And given the long term thesis of very large amounts of stored waste, I'm trying to understand why closing this is not a fairly negative step?

Speaker 2

It's not negative at all. Number one, the PCV treatment is at the other Oak Ridge facility. And that will continue. That facility, we have just a good example, we have almost 70 acres at that facility. It has a tremendous permit and license.

We have the ability to easily expand. The capabilities of M and EC, it's a very old building. It is an extremely expensive building. It's also on a DOE site, which adds tremendous institutional costs and other issues. The Department of Energy, their long term plan is to tear that building down.

And so when they called us and said we would really not interested in extending the lease because we need that for redevelopment. Our initial reaction was fine. This is a perfect time. We've been looking at it over the last two years. We've been building up the capabilities of the other three facilities.

And it was really obvious to us that the tremendous cost at M and EC were not worth the capabilities there that we had at other facilities. So it was a very easy decision at the time.

Speaker 3

Therefore, I we'll be

Speaker 2

closing the permit we'll shut the permit down. It will be gone. And the capabilities there will be closed. But our capacity to treat waste will exist at all the other facilities.

Speaker 3

And so the answer, my words, is you have enough capacity elsewhere as you look at your expected flow of waste streams to handle it without this facility?

Speaker 2

Yes. The M and EC facility was a value initially when you had at Oak Ridge tens of thousands of drums of waste that really had low revenue associated with them and had to be treated in large volumes and rapidly. And they were very close to the facility. You needed large storage to get those out of the sites and move them to a treatment facility. And we now have that ability at the other three facilities so that we can easily dramatically expand our ability to treat waste if needed, but at a much lower cost and with much lower much ability to offer a lower cost and still make a very good profit on it.

So when we looked at this, to be honest with you, it was a very we've been believing this for quite thinking about this for quite a while.

Speaker 3

Okay. Thank you. I got it. Yes.

Speaker 0

You. Our next question comes from Bill Chapman, a private investor.

Speaker 4

Hey, guys. Good morning.

Speaker 3

Hey, Bill. How are you? I'd like

Speaker 4

to hold you fine. I want to commend you and your team for coming up with all these new ways to different processes, including the medical. And I would like to know, we've been talking about this one plant you're doing this test on that's got 56,000,000 gallons of waste and you can treat approximately 80% of it. I was curious about the other government plants that have waste to be treated. If this works out and you can carry that to these other plants.

Could you give me an idea Lou about much untreated waste is there out there with these government facilities?

Speaker 2

Well, one, we haven't really disclosed what plant we're working at. And the but and I've tried to talk in very broad terms about this because we are under confidentiality agreements here with our clients. But again, you're looking at this, if you think about it, all you need to do is go to the DOE websites and there's a tremendous volume of defense high level waste sitting out there at four or five sites. Savannah River, Idaho, Hanford all have tremendous volumes of high level waste. And they some of them will be treated on-site, but what we think we have is the path forward to treat some of the problematic high level waste streams very simply and easily at our facilities.

And so at this point, we're seeing great success, great progress. We're hoping here to as I've mentioned in the past, by the end of the year to have not only treated high level waste streams, but to put them in a disposal facility to go through the whole process. And the excitement here is as much as that this project is today it'd be hard to talk about all of the commercial high level waste that sits out there because there are all sorts of institutional barriers for that waste. And our present strategy is take a reactor core and throw it in the ground for high level waste, which is one way environmentally crazy. And as I said, this is sort of the defense waste offers a proven ground to fine tune how you treat high level waste.

And so we're really excited about that to be at the forefront of providing some of those options. So there's a lot of it out there. Hopefully by the end of the year we'll really be able to talk in very specifics and details on how it works and how we pull this off. But right now it's like I said, it's attracted some of the all the way to the top of the government. There is attention on what we're doing.

So we're really excited about that.

Speaker 4

Okay. Let me ask you too, are there any new technologies or a way to process that could threaten this big advantage you possibly

Speaker 2

have? No. What we have is we have the technologies to do the whole kit and caboodle very simply, easily and inexpensively. This is we're not talking about grandiose big treatment new technologies. You're taking chemistry and use it to solve the problems and put it in a form that environmentally would last geologic times.

Speaker 3

I

Speaker 2

mean, there are what we're offering is you could take nuclear waste, put it in a waste form through treatment that will last over geologic times and we have examples in nature where it has where exactly what we're proposing has lasted geologic times. So we don't need anything fancy. We've got simple solutions that don't require exhaustive capital expenditures or dramatic breakthroughs in science here.

Speaker 4

Okay. Thank you. And let me ask one more question on the raise to the Perma Fix Medical. Do you anticipate that possibly next month or two

Speaker 2

Yes, we're making we've got several options we're going down. There's been no final decision on a final option. We're looking at several options and we're excited about the possibilities there. And hopefully, we'll be able to talk in more detail in the very near future. And your timeframe is about correct.

We should be able to talk about that in the next two months.

Speaker 4

Okay. Okay, guys. Thank you.

Speaker 0

Thank you. Our next question comes from Robert Mining, a Private Investor.

Speaker 3

Lou, is there anything you would be free to say now to help quantify the magnitude of this high level waste opportunity from sort of visible stuff in the near term? It may be that you can't say more than you've already said, but whatever you can give us on quantifying that would be of interest.

Speaker 2

Well, it's hard to quantify because but Department of Energy for Defense Waste high level, the budgets are in the hundreds of billions of dollars right now that have been accrued on the federal balance sheet. So you're talking and we think we could do it for a fraction of that. So you're talking a dramatic market just in defense waste. Now some of that we will not there are processes going on at the sites which will treat some of that. And so we're not talking about the whole thing, but we think we can contribute significantly to reducing that number dramatically.

You're talking about multibillion dollars. There's a I could tell you that at least that. They're easily multibillion dollar business.

Speaker 3

I'm sorry, multibillion dollars net to PermaFace?

Speaker 2

Right.

Speaker 3

And I presume this would be over a period of many years. What sort of magnitude are you talking about for the

Speaker 2

number of years to get there? Well, as you've all learned, nothing goes fast in this business. And it will be a what we think is a multiyear project to demonstrate and to move up the chain. And we're very focused now on the second step, which will be to go from tens of gallons to thousands of gallons for next year. But easily, if you look at our facility that would do this, it could handle very significant volumes of waste.

Great. Thank you. Thank

Speaker 0

you. Our next question is a follow-up from Bill Chapman, a private investor.

Speaker 4

Ben. Could you address the tax credit you guys were able to take on the write off? Do you expect to get a sizable amount of money from the IRS back or give us some

Speaker 2

No, it would it's just an expense adjustment. We normally, on all other aspects of our taxes have a valuation allowance, which allows us to not report taxes. If you recall though, I don't know, a year or so ago, we had to take a tax adjustment because of what's called an impairment tax credit. Please don't make me get into what all that means, but it's related to the permits and the long lived intangible assets. And so because we are now impairing one of those assets, we're actually going the other direction.

This will just pretty much just increase our NOLs over time. And therefore, it's all kind of mixed into a total tax burden, but there won't be like an immediate tax pickup because we're not paying taxes at this time.

Speaker 4

Thank you.

Speaker 0

Thank you. At this time, we have no further questions. I will turn the call back over to our speakers for closing comments.

Speaker 2

Once again, I'd like to thank everybody and we appreciate your support. Look forward to strong second half growth in treatment and services and very excited about the outlook. Look forward to providing you additional updates in the

Speaker 3

near future. Thank you all.

Speaker 0

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