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Perma-Fix Environmental Services, Inc. (NASDAQ:PESI)

Q1 2014 Results Earnings Conference Call

May 08, 2014 11:00 AM ET

Executives

David Waldman - Crescendo Communications

Dr. Lou Centofanti - Chairman and CEO

Ben Naccarato - Chief Financial Officer

Analysts

Al Kaschalk - Wedbush

Bill Nasgovitz - Heartland

Operator

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 may begin.

David Waldman

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. Lou 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 also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at 212-671-1021.

I'd also like to remind everyone that certain statements contained within this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements on this conference call, other than the 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 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 Dr. Lou Centofanti. Please go ahead, Lou.

Dr. Lou Centofanti

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've 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 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 I am 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 government’s fiscal year -- end of fiscal year. In the past when budgets have been delayed we have seen the DOE rest to spend its allocation before year-end and or risks 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 previous delays. You've seen the recent award is a multi-million dollar United Kingdom contract further evidence our strategy as working where we're focusing on more commercial, more international. And currently bidding on a number of very similar contracts. We were very excited about the UK contract and that also shows that our technologies are of the best in the world, the screen, the variety of technology to our mercury treatment and had picked ours as the preferred method.

Also remember, many lump share remember back in ‘12, Department of Energy prime contract that 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 (inaudible) that we have been awarded a contract up to about $1.2 million process radioactive liquid waste at the side.

And as time progresses here I think you'll 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 mean time, we have very much focused on our organization and have continue to reduce overhead expense to streamline the organization and work hard to diversify our revenue streams into both commercial and international.

Lastly, probably some of the more exciting things going on besides to pick up in business. The other exciting event has been the rapid progress, we're making on advancing our new process with production of tech-99.

As discussed on the last call, we now fully validated our technologies through test conducted both at POLATOM in Warsaw, Poland and the University of Missouri Reactor in the U.S. 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 discussed we have transferred devices for our medical technology into our subsidiary. And we have interest from the number of groups to finance the technology at the subsidiary levels.

And we are very excited about this new process. We believe it can meet global needs for tech-99 without the use of weapons grade uranium. Our process dramatically reduces environmental concerns and we are producing much more reliable process for making tech-99 and it does not involve the processing of high level waste or the production of high level waste. So as we sit today, we think we 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 two. We expect further improvements in quarter three. We still see enormous opportunities ahead on the service side, as well as moving into the more higher activity and complex waste treatments 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 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’ll be back to answer questions at the conclusion of formal remarks.

Ben Naccarato

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 $0.47. The decrease in revenue was primarily from the service segments 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 of 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 facilities 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 mixed produced.

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

Our gross profit for the quarter 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 higher gross profit in the remainder of the Service segment of about $576,000. Again lower cost 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 $4.2 million a year ago again labor cost reduction and outside service cost were the main -- drops from 2013 legal fees and labor reductions were the main reasons for that. Our loss from continuing operations before taxes for the quarter was $3.7 million compared to $4.3 million last year. Our loss 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 [5 fold] valuation allowance on our deferred tax assets 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 this cash was used primarily to pay down accrued and accounts payable. Our receivables and prepaid expenses were 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, 15 -- as stands at $15.7 million of which PNC, our main creditor, our credit stability represents $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 was $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'll now turn the call over to questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Al Kaschalk with Wedbush. Please Proceed with your question.

Al Kaschalk - Wedbush

Good morning, Lou.

Dr. Lou Centofanti

Good morning.

Al Kaschalk - Wedbush

Good morning, Ben.

Ben Naccarato

Hey Al.

Al Kaschalk - Wedbush

Can you give us an update on the capital raise, where you stand and the timeframe? And then secondly, (inaudible) I think what you said at end of the 2014, you are seeking FDA approval, is that correct?

Ben Naccarato

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

As we sit today, if I had to probably the one that looks 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. We have a partner there in POLATOM who bakes generators 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. Then I think that could be completed by within a little a over month.

Al Kaschalk - Wedbush

Okay, so by the end of the second quarter?

Ben Naccarato

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

Al Kaschalk - Wedbush

Is this just would then be viewed as a strategic investment by them or this is private investors, I am sorry it wasn’t clear?

Ben Naccarato

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

Al Kaschalk - Wedbush

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

Ben Naccarato

Yes, initially it’s approximately $3 million to get the company up and running in setup and get it moving. So the first financing will be fairly small at this stage. We should end up still being a very major shareholders in the subsidiary.

Al Kaschalk - Wedbush

But you are financing here this around is small meaning 20% and 15% of that $3 million number or is that kind of what were you talking about or you are talking more?

Ben Naccarato

No $3, where it is approximately $3 million is what we hope for.

Al Kaschalk - Wedbush

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?

Dr. Lou Centofanti

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 important part would be to involve other strategic players that could help guide us in really -- from a user point of view. So we consider that to be real important is to bring in some partners.

Al Kaschalk - Wedbush

Okay. On the base business, I think we are all expecting sort of a tough quarter, but it struck me is particularly weak at the gross profit line. And I am just wondering if that’s a function of fixed cost that you are unable to maybe cover or how do we think about the near breakeven at the gross profit line?

Ben Naccarato

I think it’s a combination the revenue was a lot lower than we would expect and when Lou talked about a bounce back we hope that it’s going to be significant to do $10 million in the quarter is very low and as you know we’ve got a pretty -- we have certain fixed costs we can’t overcome. We also are continuing to adjust to the large drop obviously in the hampered gross profit because that was a very strong contract on the gross profit line.

We think with the normal revenues getting back to the normal stream and the cost reductions we’ve put in place we can get back to the kind of margins we usually look at specially on the treatment side and the service side is showing improvements in their margins as well. It’s really a function of low revenue right now.

Al Kaschalk - Wedbush

In terms of the second quarter can you give us something a little more tangible than that you starting to see contract come in or publicly awarded. Is that both areas and if so what are we…

Dr. Lou Centofanti

Yes it’s in both areas, treatment is growing significantly and the service side I made a comment in fact last night actually I think we probably in the last month have won more contracts than we won all last year. So I think on the especially on the service side. So I think we are seeing a fairly significant pickup in the service work. And we are seeing 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 time and when material comes in and how soon, which is always the uncertainty here? At the very least we’ll have a pretty good EBITDA and hopefully even better than that, maybe even I think it's even a possibility of positive earnings.

Al Kaschalk - Wedbush

Nothing, get ahead of your -- ahead of what you're 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 quarter and second service. I don't know where we are on that one, because we've been declining as you know for the last several quarters?

Dr. Lou Centofanti

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

Al Kaschalk - Wedbush

And on the service side?

Dr. Lou Centofanti

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

Al Kaschalk - Wedbush

Okay. My final question, thanks for that color. My final question is sound that line you are surprise by the lack receives or in significant amount of receives in the quarter. Is that fair or is already seen April and May?

Dr. Lou Centofanti

Our forecast for first quarter we’re better than -- and there were a series of events which daily respond to some start-ups, new start-ups on projects. Things have been closed down, they were starting things back up, we thought we were going to get some material ramp in the first quarter, because the issues they had we saw delay. So, it was not as we weren't expecting it quite as bad as it was. But that's now all, it's all turned around pretty rapidly now.

Ben Naccarato

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

Al Kaschalk - Wedbush

Well I imagine weather probably had 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 been a pushed out?

Ben Naccarato

No, it should call out. I mean it's still there, it's not materially loose. So, it is more a case as it's being delight and pushed into another quarter and why we think second and thirdly better than.

Al Kaschalk - Wedbush

Okay. Thank you.

Operator

Our next question comes from the line of Bill Nasgovitz with Heartland. Please proceed with your question.

Bill Nasgovitz - Heartland

Good morning Lou.

Dr. Lou Centofanti

Hey Bill.

Bill Nasgovitz - Heartland

Well, it's good to be hear that perhaps positive -- do we hear that correctly, positive EBITDA in Q2?

Dr. Lou Centofanti

Yes.

Bill Nasgovitz - Heartland

And close to breakeven?

Dr. Lou Centofanti

Close to breakeven Bill, either way depending upon when they arise.

Bill Nasgovitz - Heartland

And with this order pick up, you expect to be profitable in the second half of the year; are we going to be profitable in Q3 and 4?

Dr. Lou Centofanti

Yes, our forecast as we sit today show profitability, when we decide as Ben has mentioned revenue will have of course has the dramatic impact because of we have also restructured how we operate and then doing so cut a significant amount of cost out of overhead, so where our breakeven has been pretty dramatically reduced moving forward so.

Bill Nasgovitz - Heartland

To what level, what do we need per quarter to breakeven generally speaking?

Ben Naccarato

Well, the cost, I mean the changes Lou is talking about have recurred after Q1 and you know $600 and $700,000 of six past saving the quarter, initiated and that along with getting back to our normal gross margin usually get and we should get us there.

Dr. Lou Centofanti

Yes. The number on the treatment side is about $10, the $10 million we make money and service side is five and six range, but we see close to that and the second quarter is closed.

Bill Nasgovitz - Heartland

Okay. We are pushing at $20 million, how do we stand with our bank, our creditors here, what’s the status there?

Ben Naccarato

Again, our bank is very supportive of us as you saw at last -- at year-end when they provide wavier and relief on 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, as we saw that coming. So, it’s a build-up of 3, 6, 9 and 12 months fixed charge ratio which is really the EBITDA number that has hurt us the past couple of times we’ve had the issues. But they are very supportive of our company and our business. We’ve been together more than 12 years. And so we're comfortable, so long as things continue to improve that will be okay with them.

Bill Nasgovitz - Heartland

Okay. And then lastly, Lou, you said something about significant opportunities here on 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 passable?

Dr. Lou Centofanti

Yes, the service business, we’ve seen a -- when you look at Perma-Fix, you really got two great niches, one being waste treatment and the second being health physic. And we’ve continued to focus and we’ve actually in these reorganizations have refocused the organization 100% on those two areas. And the health physics business is just so everyone understands is when it just -- anyone in nuclear has to have health physic. It’s the guys that measure radiation, it’s the guys that do the plans, it’s the guys that understand the effects of radiation and what you can do with it. So tremendous opportunity in the service side, everything the [process] is passed from one extreme, we do a lot of work on the natural occurring areas, we’re one of the leaders in that, the NORM wastes, we are writing the regulations for fracking in Pennsylvania, for the fracking industry, we are helping them on 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 in -- with the Canadian nuclear industry, both from a waste treatment point of view and from the service side providing health physics and the expertise there.

So the industry, the service side of health physics is a met; it’s probably $1 billion a year industry. And our growth there, we are still small but the growth will continue with our groups and so, it’s considered one of the best in the industry.

Bill Nasgovitz - Heartland

So how small are we, what do you anticipate doing in this area in 2014.

Dr. Lou Centofanti

When you look at our service side, most of it is health physics. And today it’s $20 million - $25 million business when we look at the whole thing. Now it’s been larger in the past, but because of the cut backs at DOE, we've refocused more on the commercial, more on the international and continue to focus on DOE and Department of Defense. But I think, you'll see that group continuing to grow significantly and that's where all our wins are coming from. We've had a significant number of contract wins on the health physic side that are really breaking into a lot of new markets, because of our reputation.

Bill Nasgovitz - Heartland

So, but any additional color in terms of what contract size you might be talking…

Dr. Lou Centofanti

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

Bill Nasgovitz - Heartland

Okay. Who do we compete against, who is winning those contracts or has in the past?

Dr. Lou Centofanti

Well, the last year or 2, it's -- we haven't lost very many. I’d have a hard time even sitting here saying which ones we have lost. It's 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 [can burn] that have health physics services. And, but in certain areas like on the natural occurring, we're probably one of the experts there right now and that's where most of wins have been and in terms of the natural occurring radioactive materials and the core 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 downs of government work.

Bill Nasgovitz - Heartland

Okay.

Dr. Lou Centofanti

So, I hate to talk about specific ones we’ve bid on that, because they're won, they are so many and each one is so much complicated because we're on teams with a variety of players.

Bill Nasgovitz - Heartland

Okay. Thank you.

Dr. Lou Centofanti

Yes.

Operator

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.

Dr. Lou Centofanti

Well, I'd like to thank you all for participating. As I mentioned earlier, very encouraged by the outlook of the business, things are beginning to turnaround in the second quarter as we are seeing long delayed contracts beginning to be awarded. We are seeing significant growth opportunities ahead on the treatment side. And we've dramatically cut fixed-cost, both operating and SGA by streamlining the organization and believe that 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’d like to thank you all again for your support and look forward to follow up in the next quarter. Thank you.

Operator

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 wonder day.

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