Perma-Fix Environmental Services, Inc. (NASDAQ:PESI) Q2 2023 Earnings Call Transcript

Perma-Fix Environmental Services, Inc. (NASDAQ:PESI) Q2 2023 Earnings Call Transcript August 6, 2023

Operator: Greetings. Welcome to the Perma-Fix Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, David Waldman, Investor Relations at Perma-Fix. You may begin.

David Waldman: Thank you, Paul. Good morning, everyone and welcome to Perma-Fix Environmental Services second quarter 2023 conference call. On the call with us this morning are Mark Duff, President and CEO; Dr. Lou Centofanti, Executive Vice President of Strategic Initiatives; and Ben Naccarato, Chief Financial Officer. The company issued a press release this morning containing second quarter 2023 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 revision 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 on our website. I’d now, like to turn the call over to Mark Duff. Please go ahead, Mark.

Mark Duff: All right. Thanks, David and good morning, everyone. I’m pleased to report that we are back on a solid growth trajectory and have returned to profitability following the impact of the COVID-19 pandemic. We continue to realize improvements in our performance and are regaining the momentum we had prior to the pandemic. As evidence of our turnaround, we achieved a 28.7% increase in revenue to $25 million for the second quarter of ’23 versus 19.5% for the same period last year. Importantly, we’ve also achieved sequential growth of revenue to 24.5% compared to the first quarter of ’23. Revenue increased both year-over-year and sequentially. With our Treatment and Services Segment together, the growth in revenue reflects the initiation of several new projects won in the early part of ’23 that support the backlog in both segments and provide growth opportunities into ’24.

In addition to our revenue growth, gross profit increased by 56.6% and gross margin increased from 14.8% to 18%. Within the Services Segment, we were recently awarded 2 new contracts that are expected to start in the third quarter of ’23 and we believe further — and will further expand our backlog. The combined value of these awards is estimated to be over $8 million for the next few years but are front-loaded over the next 18 months with opportunities for expansion along the way. These awards include a task order project from the U.S. Army Corps of Engineers in support of their Facilities Reduction Program, as well as an award as a team subcontractor in support of the Los Alamos National Lab for Department of Energy. Both of these awards leverage our core competencies, including characterization, remediation and disposition of hazardous materials and waste management.

We also commenced work on awards granted earlier this year that have now begun to generate revenue and have helped to offset the Princeton and McKee projects which will begin to wind down in the fourth quarter. We also continue to develop new proposals and have realized significant increases in activity within both segments, including the U.S. Navy and the U.S. Army Corps of Engineers as well as several activities at DOE sites and ongoing initiatives with our international and commercial clients. Within our Treatment Segment, we witnessed an increase in volume with strong waste receipts during the second quarter which provides us a solid backlog for our plants and improved visibility for the balance of ’23. This was a result of increased waste shipments from DOE to our EWOC facility here in Oak Ridge throughout the second quarter, along with steady sales from our industrial waste programs as well.

We expect to a see steady improvement in waste receipts and an increase in project work from existing contracts, new contracts and bids submitted in both segments that are still waiting for award announcements. At the same time, we’re rapidly advancing several initiatives that we believe have the potential to significantly enhance our revenues and our long-term backlog. Despite a few delays in award announcements, these growth initiatives have remained on track. The $3 billion DOE operations and site mission support contract referred to simply as the OSMS is tied to the recent Portsmouth D&D award and is due to be announced any day. The ITDC contract — tank contract closure — excuse me, the ITDC tank closure contract, have seen quite an unusual procurement cycle, including an award to our competitor with a later determination ruling that the awardee was ineligible for the competition due to non-compliance with the government’s systems for award management requirements, commonly referred to as the SAM.gov system.

As a result, DOE has 2 primary options which could include awarding a project to our team or rebidding the contract for a third time through a new procurement. We anticipate learning more about the DOE decision for this initiative in the third quarter of this year. The JRC award in Ispra, Italy is due to be announced in the third quarter of ’23, soon after the European folks complete their August holidays and get back to work which we’re anticipating, I think, something in the September time frame. Receipt of this award will provide a foundation for long-term growth within the European markets and open several opportunities to support existing IDIQ contracts held by Perma-Fix in the U.K. and strengthen our relationships for waste treatment in both Germany and Croatia.

These opportunities are expected to provide sustained receipts beginning in the next several quarters providing a combined annual revenues estimated in the $10 million to $20 million range. The Test Bed Initiative or TBI program, also known as the low-level waste off-site disposition project in support of the DOE Hanford tank waste disposition mission continues to progress. The submittal of the RD&D permit from DOE to the state of Washington regulators was completed in the second quarter. And following their upcoming public comment period and the approval by the state will allow DOE to begin to extract the 2,000 gallons of waste from the tanks for the Phase 2 grounding demonstration anticipated to be later this year. The TBI program is recognized by DOE as a potential supplement to the vitrification mission to provide a solution for the 59 million gallons of tank waste stored on the Hanford site.

Perma-Fix maintains these grounding capabilities today in our Perma-Fix Northwest facility in Richland which is permitted and outfitted to safely and compliantly grout up to 30,000 gallons a month with the ability to expand that capacity to well over 1 million gallons annually, while dramatically reducing cost, risk and schedule as compared to the vitrification program alone. It’s important to note that our Perma-Fix Northwest facility offers the local or regional option for grouting as the only the only one — only option for regional or local grouting for tank waste versus other options to ship untreated waste out of state for grouting and disposal which is defined as the higher risk alternative in the recently approved environmental assessment and the recent WIR documents.

In the meantime, we’ve progressed over the past two quarters in our strategy to maximize the value of our waste treatment offering in support of the Department of Energy’s Hanford closure mission. Towards that end, we recently entered into an alliance with the Local 598 Pipefitters Union in the Tri-City to provide a labor support for a grouting offering for the tank program. We believe this partnership increases the value of our offering to the DOE through our labor availability and our labor stability for the grouting program when it reaches an operational level, while providing a treatment option that can accelerate the reduction of the environmental liability in the region. We consider this as a big opportunity with the Local 598 as the waste receipts increased on all of our Hanford waste programs, including the DFLAW program which appears to be on track for the late 2024 start-up of the vitrification plan.

It’s worth noting that the DFLAW facility achieved a major milestone last week when it successfully heated to 2,100 degrees Fahrenheit in its testing phase. The waste that will be produced from the DFLAW facility is estimated by DOE to be over 8,000 cubic meters annually and will begin to be received at Perma-Fix facilities upon a hot start-up of the plant, like I said, currently projected for late 2024. As I’ve mentioned in the past, the volume of this waste would more than double the production of all our plants combined on an annual basis. Overall, we continue to see slower than usual procurement cycles and difficulties with government clients in getting projects awarded despite funding levels that remain unspent. However, the return of workforces across the DOE and other government agencies, we see optimism that these procurements will continue to increase in activity that we saw at levels prior to COVID-19.

Turning back to our financials for a moment; EBITDA in the second quarter of ’23 improved to an income of $1.5 million compared to a loss of $0.4 million for the same period last year. We also returned to profitability after climbing back from the pandemic over the past 3 years and we achieved a net income of $474,000 in the second quarter of ’23 compared to a net loss of $1.4 million in the second quarter of last year. At the same time, we continue to invest in our capabilities and facilities. We have built a solid foundation for growth and a highly scalable infrastructure. As we continue to increase revenues, we expect to benefit from this predictable cash flows from our Services Segment and the high incremental margins within our Treatment Segment.

So to wrap up, we remain optimistic that 2023 will realize continued growth in both segments as we expand our market base and develop strategic teams to optimize win probabilities for upcoming procurements. While we continue to realize impacts due to labor shortages, we’re heavily focused on increasing productivity and reducing cost to maximize our margins. Our growth strategy includes also expansion of our waste services in Europe and with commercial power generators as well. We believe that we will see a growth in receipts in both these groups in the next few quarters. Overall, we remain confident in our ability to maintain the growth and stability we experienced prior to the pandemic and we’re encouraged by the market outlook, given our solid sales pipeline with a number of important contracts expected to be awarded over the next few quarters.

On that note, I’ll now turn the call over to Ben, who will discuss the financial results in more detail. Ben?

Ben Naccarato: Thank you, Mark. I’ll start with revenue. Our revenue — our total revenue from continuing operations for the second quarter was $25 million compared to last year’s second quarter of $19.5 million, an increase of $5.5 million or 28.7%. The increase in revenue was attributable to both our operating segments as our Treatment revenue was up $4.4 million and the Service segment was up 1.1%. The increase in the Treatment Segment was primarily volume related as all our facilities processed more waste and the increase in the Services Segment was driven by both increased project work — or by increased project work on our two large contracts. Year-to-date through June 30, our ’23 revenue increased over prior year by $9.8 million or 27.6%.

And again, revenues up compared to prior year at both segments. As with the quarter, high volumes at the waste treatment contributed to the increase in revenue. In the Service segment, the 2 large projects have been in full production for the entire 6 months of ’23, while they did not begin full production until close to the second quarter in ’22. Looking at gross profit for the quarter, we had $4.5 million compared to $2.9 million in ’22. As with revenue, both operating segments contributed to the improved total gross profit of $1.6 million. In the Treatment Segment, higher revenue drove the improvement although there was an offset from the mix of waste for lower margin waste streams as well as higher fixed costs at the plants. Service segment gross profit improved as a result of higher revenue as well as better margins realized on our project work.

Again, for 6 months ended June 30, our gross profit was $7.5 million compared to $4.5 million in the prior year. This $3 million improvement was from both segments as the Treatment Segment revenue increase was partially offset by the impact of the higher fixed costs and the lower margin waste mix. In the Service segment, similar to the quarter, increased revenue and improved margin realized on the projects contributed to the higher gross profit. Turning to SG&A, our costs for the quarter were $3.6 million, representing 14.2% of revenue compared to $3.7 million or 18.9% of revenue. Our SG&A costs were lower due to lower audit fees and payroll-related expenses and they were offset by higher expenses related to stock options and higher outside service costs related to financing efforts.

For the 6 months ended June 30, our G&A sits at $7 million or 15.6% of revenue compared to $7.1 million or 20.1% of revenue last year. Again, lower audit fees were the main contributor to this small reduction and they were slightly offset by higher outside fees related to financing. Our net income for the quarter was $474,000 compared to last year’s net loss of $1.4 million. For 6 months ended June 30, net income sits at $63,000 compared to a net loss last year of $2.8 million in ’22. The basic earnings per share for the quarter was $0.04 compared to a loss per share of $0.11 in the prior year and the year-to-date basic income per share is at 0 compared to losses last year of $0.21 per share. EBITDA from continuing operations, as we defined in this morning’s press release, is at $1.5 million compared to a loss of $403,000 last year and EBITDA year-to-date stands at $1.7 million compared to a loss of $1.8 million in ’22.

Turning to a few balance sheet items; our cash on the balance sheet was $4.8 million compared to $1.9 million at year-end which reflects our positive cash from improved operations. Our current receivables and liabilities were up approximately $3.6 million and $3.2 million, respectively, as a result of increased operations and the timing of collections and payments. Our waste backlog for the end of June was $8.9 million which is close to the $9.2 million at year-end and up from $7.2 million a year ago in June of ’22. Our total debt at the quarter end was $854,000 which excludes debt issuance costs which is primarily due to our lender PNC Bank. And finally, I’ll summarize some cash flow activity for the year. Cash flow from continuing operations provided was $4.8 million, cash used by discontinued operations was $336,000, cash used in investing, continuing operations was $1 million and it’s primarily capital spending, cash used in financing was $290,000 which represents our monthly payments on our term and capital loans of $273,000, payments-related finance, leases and liabilities of $118,000 and proceeds from option exercises of $101,000.

And then finally, I’m pleased to report that on Monday, July 31, this week, we amended our loan agreement which, among other things, extended the maturity date of our credit facility for an additional 3 years or to May 15, 2027. As part of this amendment, our lender provided a new term loan of $2.5 million which will further support the company’s liquidity position and will be used for general working capital needs, facility capital and maintenance. Perma-Fix is now banked with PNC for over 25 years and this extension underscores the strength of this relationship which has endured through many highs and lows. With that, I will now turn the call over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] The first question today is coming from Howard Brous from Wellington Shields.

Howard Brous: First of all, congratulations to all 3 of you on what is a very good quarter. So as a shareholder, I’m rather pleased about that. I’ve got a few questions that I want to focus on. First, last quarter on the conference call, you mentioned close to near-term opportunities in Slovenia, Croatia, Mexico, Canada, U.K. and Germany. You mentioned a couple of them on the call just before. Have we lost any of those opportunities? That’s the first question. And secondly, if not, when would you expect to see some of those awards? And could you talk about the total size of what we’re looking at there?

Mark Duff: Sure, Howard. No, we have not lost any awards. They have — they’ve moved with the U.S. government, they move quite slowly. We’ll start with Croatia. We have 2 procurements that we’re supporting right now, one for treatment of resins which we’re likely going to move into an R&D phase with them on that which will be quite small initially but with an opportunity if technology proves successful to expand. But the other one at Croatia is around a $20 million project that’s due to be awarded in the September time frame. The second round of the RFP just came out here and is due, I think, next week. So that is still in play. And we have a very — an innovative offer for that project and we remain optimistic about it. So that would also impact Q4 if we were successful.

The JRC contract I mentioned, obviously, has not been awarded yet. And — but we did have discussions with the client and they said as soon as they get back from vacation, there should be an announcement. So that’s, again, early September. Several other ones are still brewing, particularly Germany. We’re working with a broker agency to support the decommissioning of about 12 reactors over there right now. That’s moving forward rapidly. We’re hoping to be able to — so supporting that waste treatment process in fourth quarter or Q1 time frame. We do continue to get waste from the German commercial firms that we’ve been working with for quite some time now on a quarterly basis. And then in the U.K., we’re also working on several initiatives there.

Again, we still have our agreement with Westinghouse that if we’re successful in JRC, that we will move forward with that new plant. We also — I’m not sure if we ever talked about it but we do have a couple of other IDIQs that we won with the U.K. government for waste treatment and we continue to get task orders out from that to treat the waste over here with a new plant in Springfield with Westinghouse. We’ll be able to treat over there. I mean, much, much more competitive. And that IDIQ continues to be active. So lots going on over there; there’s a couple of other initiatives that are going on as well in earlier stages but looking for real momentum in the next two quarters over there and big impacts for next year, particularly. And to answer the last part of your question, we anticipate when all these things are clicking, with a couple of these awards that we should be able to assume the $10 million to $20 million a year revenue stream internationally which will ramp up in the next year or two.

Howard Brous: Let me continue on. There’s been a lot of discussion about the dismantling of the aircraft carrier. I hope I have the right one, Enterprise which is docked in Washington State. And in the process of dismantling the nuclear reactors, they plan on encapsulating them and transferring them to, of course, Hanford — that magical name. Can you discuss the opportunity there?

Mark Duff: Sure, Howard. That’s a big one for us. The Enterprise is the next ship slated for decommissioning. They just finished the final EIS. I believe, it has been signed last quarter and the final EIS completion is the trigger to move into procurement. We’re expecting the draft RFP to be out in the fourth quarter, early fourth quarter, like October timeframe. That aircraft carrier is actually sitting at the Norfolk naval shipyard in Virginia. I believe it’s at the Huntington Ingalls facility there. And we are just completing our team advances for that that we go through and signatures for these agreements are waiting on the draft RFP. It’s estimated, Howard, to be in the $800 million to $1 billion — $800 million to $1 billion of total revenue.

I’m not sure what the final RFP is going to look like. And how much risk we have to take that will dictate really how close to $1 billion that project gets. The other exciting thing that we’re anticipating is that the RFP will include a 20% small business set aside. The last several that have come out have included that small business set aside. We’re expecting this one too as well. And that kind of gives you a sense of where we’ll likely be in total revenue for a project like that.