Perma-Fix Environmental Services, Inc. (NASDAQ:PESI) Q3 2023 Earnings Call Transcript

Perma-Fix Environmental Services, Inc. (NASDAQ:PESI) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Good day, and welcome to the Perma-Fix third quarter 2023 earnings conference call. [Operator Instructions] It is now my pleasure to turn the floor over to your host from Investor Relations, David Waldman. The floor is yours.

David Waldman: Thank you, and good morning, everyone. Welcome to Perma-Fix Environmental Services third quarter 2023 conference call. On the call with us this morning are Mark Duff, President and CEO; Dr. Louis Centofanti, Executive Vice President of Strategic Initiatives; and Ben Naccarato, Chief Financial Officer. The company issued a press release this morning containing third 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.

A specialist cleaning service team in full protective equipment removing hazardous waste.

All statements on this conference call other than a statement of historical fact, are forward-looking statements, that is 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 US Securities and Exchange Commission, as well as this morning’s press release. 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 reference 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. We achieved another solid quarter as evidenced by an 18.4% increase in revenue to $21.9 million versus $18.5 million for the same period last year. And addition to our revenue growth, gross profit increased by 48.2%, and gross margin increased from 16.6% to 20.8%. Importantly, we achieved net income of $341,000, and EBITDA of approximately $1.2 million for the third quarter of 2023. The growth in revenue reflects the commencement of several new projects grand earlier this year, that support the backlog in both segments, and provide growth opportunities into 2024. We also improved productivity on certain projects, that had previously been delayed from the lingering effects of COVID-19.

Our services in project continued to meet or exceed expectation, expected performance goals, and margins, due to strong leadership and good client relations. While we’ve achieved solid year-over-year growth, we would have generated even strong results had it not been for temporary customer delays, and in our treatment and services segment. Unfortunately, this is not unusual for our business, and contributed to a slight decline in our sequential revenue, versus the second quarter of 2023. However, these projects have since commenced, and we believe will contribute to improved results for the fourth quarter of ’23, and heading into ’24. These and other awards are expected to generate significant revenue that will offset projects, which will wind down in the fourth quarter.

Within the services segment, we realized several new awards, including a $40 million five-year contract with our joint venture, Enviro-Fix Solutions, LLC, by the Buffalo District of the Army Corps of Engineers for environmental remediation at the Niagara Falls storage site. The awards leverage our core competencies, including characterization, remediation, and disposition of hazardous material, and waste management. Looking ahead, we’re benefiting from increased bidding opportunities within our services segment overall, including both the government and commercial sectors. These opportunities include teaming of large DOE projects, and procurements, in addition to several US Army Corps of Engineers cleanup initiatives, US Navy decommissioning projects, and several international projects with sustainable revenue potential.

These bids will further strengthen our backlog with awards anticipated throughout 2024. Within our treatment segment, we experienced a steady improvement in waste receipts during the third quarter, supporting our visibility and backlog for the next year. This included increased waste shipments from within the commercial sector, along with steady sales from our industrial waste programs. We expect to see ongoing 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. We have continued to implement our growth strategy throughout the third quarter in 2023, including several new opportunities in our target list, that have the potential to significantly enhance our revenues, and our long-term backlog for next year within both segments.

In addition, we continue to await, some very large potential strategic awards by the DOE. Some of these projects are quite considerable in size, and selected by DOE would represent significant increases in sustainable revenue, to align with our core competencies. We’re hopeful that one or more of these projects will be awarded this quarter. If we are successful, we’ll participate as a team member on these large DOE procurements, which completely align with our strengths and innovations, in radiological protection and waste management. This book, despite delays in award announcements, these growth initiatives remain on track, including the $3 billion operations, and safe mission support contract referred to as OSMS, as well as a Joint Research Council or JRC project in Italy.

We anticipate both of these projects will be announced any day. In addition, we have several other smaller projects anticipate be announced in the fourth quarter of 2023. The DOC project will support our expansion program in Europe, including existing IDIQ contracts held by Perma-Fix in the UK, and the application of our treatment technologies in Germany, Croatia, and other markets in Europe. These opportunities will generate sustained receipts, beginning in the next several quarters, providing a combined annual revenues estimated in the $10 million to $20 million range, which we expect will begin to be realized in late ’24. At the same time, the Test Bed Initiative or TBI also known as the low-level waste, also disposition project, continues to progress in support of the Hanford tank mission, although at a slower pace and anticipated over the last few months.

The TBI initiative, which is based on grouting technology, will continue to re-focus Perma-Fix, as a means of saving tens of billions of dollars of taxpayer dollars, as well as eliminating several carbon emission, and reducing schedules for Hanford cleanup actions. Grouting has been recognized as a preferred supplement to the current DOE strategy, for vitrification through the direct feed low activity waste treatment plant, what we refer to as the DFLAW, for the 59 million gallons of tank waste, currently stored at Hanford. The TBI program continues to move forward, following the submittal of the RD&D permit from the DOE, to the state of Washington regulators, which was done in the second quarter. We’re continually — we’re currently awaiting the approval of the RD&D permit from the Washington Department of Ecology, which is the regulator, which will allow DOE to begin to extract 2000 gallons of waste from the tanks for the Phase 2 grouting demonstration.

Given the ongoing delay by the state, and review of the permit application, we expect an official reset of the schedule, which will include public comment on the permit, followed by approval, extraction of the waste, and treatment of 2000 gallons, which is expected to be in the second half of ’24. Now, Perma-Fix remain or maintains these grouting capabilities today at our Perma-Fix facility in Northwest or in Richland, Washington, which is permitted and outfitted to safely, and compliantly grout up to 30,000 gallons a month, with the ability to expand to well over 1 million gallons annually, while dramatically reducing cost risk and schedule compared to vitrification alone. It’s important to note that our Perma-Fix Northwest facility offers the only local or regional option for grouting tank waste, versus other options to ship untreated waste out of state for grouting disposal.

Which is defined as a higher risk in the deeper environmental assessment, as well as the recent weird documents. Another critical component of the Perma-Fix growth strategy hinges on the startup of the DFLAW facility I’ve mentioned and Hanford, which will provide vitrification services for about 40% of the tank waste volume on site. In January ’23, DOE we signed a record decision to treat the effluent waste streams from the DFLAW facility at our local Perma-Fix Northwest facility, for at least the first 10 years of the DFLAW operations. We remain optimistic about reports coming from DFLAW, in regards to the startup of the melters, and supporting systems, which continues to progress, while several steps remain before start-up DOE has announced — has not announced further delays in commissioning, which is currently scheduled for the late 2024 timeframe.

The waste that would be produced at this facility just mainly by DOE to be about 9,000 cubic meters annually. We expect that would begin to be received at the Perma-Fix facility, upon our hot startup of the vitrification plant itself. As I’ve mentioned in the past, the volume of this waste, and more than double the production of all our plants combined on an annual basis. In regards to our treatment facilities, our Florida and Washington plants have begun to realize the budgeted performance goals, we haven’t seen since pre-COVID times as labor and pricing impacts are beginning to be in the rearview mirror at this point in time. At our DSSI facility in Eastern Tennessee, we have been planted several expansion and upgrade activities, that have been underway for the past few months, which we expect will result in a broader offering of our treatment capabilities, beginning in the second half of ’24.

Importantly, we continue to invest in our capabilities in our facilities. We’ve built a solid foundation of growth and highly scalable infrastructure, as we continue to increase revenues. We expect to benefit from the predictable cash flows of our services segment, with high incremental margins within our treatment segment. So to wrap up, we remain optimistic that the remainder of ’23 and ’24 will realize continued growth in both segments, as we expand our market base, and develop strategic teams to optimize win probabilities of four ongoing procurements. We’re heavily focused on increasing productivity, and reducing costs to maximize our margins along the way. Overall, we remain confident in our ability to maintain the growth, and stability we experienced prior to the pandemic, and we’re highly encouraged by the near term market outlook for the business based on our growing backlog, our sales pipeline, a number of important contracts, expected to be awarded over the next few quarters.

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

Ben Naccarato: Thank you, Mark. Our total revenue from continuing operations for the third quarter was $21.9 million compared to last year’s third quarter of $18.5 million, an increase of $3.4 million or 18.4%. The improvement came in revenues, from both our segments, as our treatment segment revenue improved by $1.9 million, primarily on higher waste volumes, though at a lower average price. And our services segment increased by $1.5 million, based on improved productivity, at one of our current large projects, and additional revenue from new projects that started in the quarter. Year to date through September 30, our revenues higher than prior year by $13.2 million or 24.5%. Again, this improvement has come from both segments.

The treatment segment revenue increased by $8.5 million, primarily on increased volume, while our services segment revenue was up $4.7 million on increased project work. Our gross profit for the quarter was up $4.5 million compared to three point — was 4.5 million compared to $3.1 million in 2022. The improvement in gross profit of approximately $1.4 million, came from the services segment, where gross profit was up $2 million from both increased revenue as well as improved profitability on our projects. Offsetting this increase was a reduction in the treatment segment, gross profit of $473,000 due in part to revenue mix as well as increased fixed costs at our facilities. For the nine months ended September 30, our gross profit was $12.1 million compared to $7.6 million in the prior year.

Again, our gross profit improved in both segments, as the service segment increased by $3.4 million on higher revenue, and improved profit productivity in its projects, while the treatment segment increased by $1.1 million, primarily on higher volume. Our G&A costs for the quarter were $3.9 million, which is consistent with third quarter last year. Increased costs for labor and legal fees were offset by savings in audit and other third party service providers. For the nine months ended September 30, SG&A expenses were $11 million, again in line with $11 million in the prior year. And as with the quarter, our lower audit and outside service costs were offset by higher payroll expense. Our net income for the quarter was $341,000 compared to last year’s net income of $664,000.

However, I want to remind you that last year’s net income included employee retention credits, $2.1 billion, which approved those earnings. For the nine months ended September 30, our net income was $404,000 compared to a loss of $2.1 billion prior year. Our income per share, basic and comp per share was $0.03 compared to income per share of $0.05 last year. Year to date, basic income per share is at $0.03 compared to a loss per share of $0.16 last year. Adjusted EBITDA from continuing operations as we defined in this morning’s press release is at $1.2 million compared to a loss of $374,000 last year. Adjusted EBITDA year to date was $2.9 million compared to a loss of $2.2 million in ’22. Turning to the balance sheet, our cash on the balance sheet sits at about $2 million, consistent with last — with year-end of $1.9 million.

Our accounts receivable and unbilled receivables were up $9.3 million, due to increased revenue, certain prepaid contract, and the general timing of our cash receipts. Accounts payable, accrued expenses and accrued disposal collectively were up approximately $2.1 million, reflecting increased costs, associated with increased revenue and the timing of vendors payments. Our unearned revenue was up approximately $3 million compared to prior year, due mostly to the certain prepaid contracts. As of September 30, our waste backlog and unearned revenue was $12.1 million, significantly improved from the $9.2 million at year-end, and $7.1 million in September of ’22. Our total debt at quarter end was $3.2 million, excluding debt issuance costs, which is owed primarily to PNC Bank.

Finally, on cash flow activity for 2023, our cash provided by continuing ops was $452,000. Our cash used in discontinued ops is $478,000. Cash used for investing of continuing operations was $1.4 million for cap spending. Cash provided from financing was $1.9 million, and that represents the net of our monthly payments, to determine capital loans of $450,000. Payments related to finance, lease and other debt of $310,000. Proceeds received in the reload of our term loan in July of $2.5 million, and receipts from other options and expenses of $150,000. With that, operator, I’ll turn the call over for questions.

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Q&A Session

Operator: Certainly the floor is now open for questions. [Operator Instructions] Your first question is coming from Howard Brous with Wellington Shields.

Howard Brous: Thank you, Mark, Ben, Lou. I hope you all well and your family as well. First of all, and most important.

Mark Duff: Thanks, Howard, and appreciate that, they are good

Howard Brous: So, what I’d like to get a sense of or a better sense of, when you look at the contract, you talked about OSAS. for Croatia, Italy, what is it all mean to Perma-Fix initially and over time and include what I believe is another contract coming from the EPA on uranium. So let’s begin with that, please?

Mark Duff: Yes, Howard, the way we look at it is the company is really in a position to maintain a pretty sustainable foundation of revenue in the $90 million a year, $100 million a year range from generally from winning projects repeatedly. We may have some down quarters as my quarters, but just generally, that’s kind of our baseload, that we should be able to do with the waste that’s generated out there each year, along with winning a number of projects within our statistical average. Then we have procurements and opportunities that that would pull us above that. And those opportunities you mentioned a couple of OSMS, which you know is in a procurement situation that we can’t really talk too much about the numbers associated with it in the JRC, same situation in ITBC, all those are funded would provide a plus up or a bump up in revenue in a significant way.

Our geography is a little smaller in US in the $40 million to $50 million range of it opens up a couple of markets for us in a bigger way in Europe. And so as far as a dollar per share, it’s very difficult to address that because we can’t get into the financial components of it, but they’ll have significant impacts on our [all] revenue stability. And equally as important put us in a position where we can bid on other larger contracts with as a qualification that is very valuable. So, we have a number of those working to hereon. As you know, those three are the primary ones, we have several other smaller ones that we’re waiting to hear on, including bids at the core engineer, banning uranium mines have all been extended project. The project that we have in Arizona was supposed to run out in August.

It got extended through the end of this month and early into November, but in the middle of November, and that will shut down for the winter because of the altitude, the mine is at and we’ll start back up in the spring. The EPA has informed us that there will be additional mines procured over the winter to start in the spring as well. So, they are finally starting to get some traction on new procurements. But we add to that a list, a long list of bids that we’re working on through the winter that will be likely awarded in the spring and summer of next year, that are very large. We’ve mentioned some of these on here before those opportunities include in the enterprise. Which we expect out the aircraft carrier that we expect out here in Q4 and late Q4, early Q1, a large project at [Y-12] West Valley DOE project, which is a $3 billion project, which we’re getting on teams for several IDIQ task orders to DOE contracts and several large waste contracts that we’re expecting to be able to bid on, to see the impacts again, Q2 timeframe.

So, lots of, we’re very optimistic that our growth opportunities continue to come in. We’re not going to win everything, but we should win a statistical quantity. That’s good because of the more of the command the better. We have revamped our business development group and brought in new people, there very high energy, very well respected in the industry and are turning over a lot more rocks for us in regards to opportunities in the radiological world, including expansion into the commercial sector in a bigger way. So overall, we do remain very optimistic about our future. While this quarter was not, what we wanted it to be overall, we did take a step back, but we still have the same momentum and we expect to get back on that trajectory in the near term.

So, hope that answered your question.

Howard Brous: So, the [tisker] and I’m not sure how many gallons are in [tisker] right now, my understanding is about 700,000 gallons, my understanding is from the DOE is that volume is noncompliant for the vitrification plant. Is that a correct statement?

Mark Duff: That is a correct statement. How is there’s been a couple of press releases is about that just in the past two weeks apparently, statistical worked exactly as planned. They pump the waste out of the tank and pump it into another tank. And what appears to be the case is the other tank contaminated, though the liquid after other pumped it in. So, I’ve been sampling the tank, they’ve got the roughly 700,000 gallon stored in, it will not meet the waste acceptance criteria for DFLAW. So, do we have said that they’re evaluating alternatives. One of those alternatives that they mentioned in their press release was that they would run it through [tisker] again, we are trying to — which obviously would just tie the [tisker] up for a while and cost money to redo it.

We’re proposing that the grout that waste and disposal of it. DOE has not made a decision on that yet, and we’re hopeful they’ll see the value in that in disposing of that waste. While they’re able to pump other tank waste out. But at any rate, the situation does not impacted the DFLAW, as I understand it, there’s plenty of time for them to pump another 700,000 gallon before DFLAW needs it. So, there is an opportunity here, hopefully for DOE to consider another alternative other than the rerun it at this point.

Howard Brous: You mentioned the rod, that basically, it is a roughly a 10-year contract, where else to the Department of Energy go. If it’s not just 10 years, but is just not a generationally long contract. You’ve got collectively 56 million gallons, high level, low level waste to be treated. And even if you did it treatment with TBI, you’re still talking 1 million gallons for the vit plant a year, which means 2 million, 2.5 million gallons that you treat. Are they going to build another facility to mimic Perma-Fix or is this basically, my belief is this NTVR are generationally long contract.

Mark Duff: They are generally long contracts, the bottom line DOE has not developer does not plan on developing the tubing capabilities, they need to handle the effluent that comes out of DFLAW. So, their position, their plan has been for the last 10 or 15 years to commercially treat the effluent that comes out of the DFLAW, as opposed to building on-site treatment capabilities. Fortunately, there is very limited. In fact, there’s really no other alternatives in the Richland area and the Hanford, other than what Perma-Fix has the capabilities to provide. So, that’s why it was mentioned in the rod, that DOE would use Perma-Fix Northwest to support that backlog, as I mentioned, which is about 8,000 cubic meters a year. So, a pretty sizable amount of waste is all different types of not just grouting.

It’s all different types of processing, different materials that would come out of that plant. And we remain optimistic that they’re on track for a late ’24, you may have seen a press release. I think it was just yesterday that they did turn on their melters and then the latest campaign, the melt — Yes, the melter got two different tranches of liquid glass. So, up to 2100 degrees and everything seems to be working as designed. So, they are continue to make progress. They haven’t announced any slips in schedule. So again, we’re still anticipating hopefully that they’ll have radioactive waste going through there in the late 24 timeframe.