Perma Fix Environmental Services Inc (PESI) Q1 2021 Earnings Call Transcript

Good day, everyone, and welcome to the Perma-Fix First Quarter 2021 Conference Call. Please note that this call may be recorded. It is now my pleasure to turn today's program over to David Waldman, Investor Relations. Please go ahead.

Thank you, Jasmine. Good morning, everyone, and welcome to Perma-Fix Environmental Services first quarter 2021 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 first quarter 2021 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 Cresendo 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 right. Thanks, David, and good morning. As anticipated, revenues in the first quarter were impacted by the ongoing effects of COVID-19, but I'd like to reiterate that we remain extremely encouraged by the long-term prospects for the company. Although certain segments of the economy have started to see a rebound as the pandemic has begun to subside, we are still feeling the impact, especially within our government business. Specifically, within our treatment segment, shipments have been temporarily delayed as the government has been focused on getting people back to work. But it's important to note, this business has not gone away. To the contrary, we expect to benefit from the government's fiscal 2020 carryover funds in addition to the 2021 allocations that have been pushed out and should help fund an acceleration of projects within the Treatment Segment, as well as the Services Segment. Within the Services Segment, we achieved modest growth in revenue, despite delays throughout the industry in evaluating bids and proposals and awards of procurements also due to the pandemic. Nevertheless, we began to see a return to normalization. Overall, clearly, we're disappointed in the impacts these delays have had on our business, but we've continued to aggressively identify and pursue opportunities that align with our core competencies, specifically in waste management and radiological remediation. In fact, as I've discussed in the past, our bidding pipeline is more robust than ever. We've been developing four to five simultaneous proposals at any given time throughout the first and second quarter by leveraging the technical and management talent that have joined our firm over the past two years. Our teams have been working around the clock on these bids and opportunities. In the past, we haven't had the resources to concurrently bid on this number and size of procurements considering the tremendous upfront resources required to evaluate and submit bids of this scale.

Thank you, Mark. I'll start with revenues. Our total revenue from continuing operations for the first quarter was $23.1 million compared to last year's first quarter of $24.9 million, a decrease of $1.7 million or 6.9%. The decrease in revenue was entirely, as you mentioned, Mark, due to the drop in revenue in our Treatment Segment totaling $2.1 million, as we continued to see delays in shipments attributed to the COVID-19 pandemic. This decrease was offset slightly by a small increase in our revenue in the service segment of $341,000 as our projects in California, Washington State, and internationally in Canada continued to operate exceeding prior year's revenue. Our costs of sales were $20.8 million for the first quarter, compared to $20.2 million last year, that's an increase of $557,000 or 2.7%. Our costs of goods sold were up modestly despite our drop in revenue. And this is due to a shift in our revenue mix. Lower treatment revenue did result in lower regulatory, material, and supply expenses. Though, we had a shift in our revenue mix in our Service Segment, which resulted in higher subcontractor expenses and lower labor and travel.

And we will take our first question from Howard Brous. Please go ahead. Your line is open.

Thank you for having me. Mark and Lou, hope that all of you and your families and the men and women of the organization are well and COVID-free. Is that hope realized?

It is. Look, Howard, we appreciate you calling in. Yes, everyone's doing well. We have no COVID cases in the company right now. So we've got most of it behind us. Many folks are vaccinated at this point, so we're starting to feel like we're coming out of it as a company. Thanks, Howard.

Really great to hear that. There have been several press releases, particularly last week, regarding the leaking tanks at Hanford. Specifically, is the TBI program viewed as the potential solution to that problem?

At the time of the question, Howard, DOE hasn't communicated their plans, their approach, or any timing for addressing the newly discovered tank that we know of. The only information that's available is what we've seen and what you probably have, as well as other investors in the press. What I can say is that the Perma-Fix technology; our facility, which is fully permitted and our approach for low-level waste stabilization, coupled with the supporting retrieval and pretreatment systems that have already been designed and fabricated for the tanks, do represent a near-term and safe option for removing and transferring and disposing of that lower waste from the Hanford tank, specifically for the B-109 tank. While we haven't seen all of the analytical data yet for this specific tank, we have reviewed the data that's in the public domain, and it does look favorable for this exact application. In other words, our technology can treat the waste from this tank for disposal quickly and at a significant cost savings to reduce the overall environmental risk and additional potential issues. In addition, the TBI program has been demonstrated and also provides the opportunity to open up space in the double shell tanks so that they don't need to build another one. So overall, it is a potential solution, but we have not specifically talked to DOE about it yet.

The TBI option's cost implementation, what kind of numbers are we talking about, particularly compared to, say, the vitrification plant? I just assume it doesn't open for many, many years.

To advance our technology as a solution, we first require the support of the DOE and the State of Washington. If we can form a partnership with them for near-term application, we believe the waste can be retrieved and pretreated to become low-level waste at the tank side during extraction. Following that, we could treat and stabilize the waste at the Richland plant and dispose of it in Texas. This process would likely take about 12 to 18 months from the initiation of the contract, which is not a significant duration. Our estimate for stabilization, transportation, and permanent disposal in Texas is around $200 per gallon, excluding the costs for retrieval or pretreatment. The B-109 tank holds approximately 123,000 gallons, so that gives a rough idea of the scale. In contrast, previous published costs for the Vit Plant or the DFLAW plant exceed $1,000 to $1,100 per gallon. It is unclear what all is included in those figures, whether it encompasses operations, construction costs, or other factors. However, we maintain our estimate at about $200 per gallon. This method would provide a permanent solution, enhance the speed of application, and mitigate further environmental risks.

So based on the numbers, which are quite obvious, why is the Department of Energy not moving forward with this alternative?

Howard, I can't speak for DOE. There are many complicated considerations concerning Hanford as a whole. Obviously, many of those we're not sensitive to in public or in our business. So a lot of things are juggling: politics, funding priorities, existing strategies. I can't answer why it's not moving forward as an alternative. DOE is aware of our capabilities. They're very aware of TBI. They're funded by the DOE. We have great relationships with the local office for DOE as well as headquarters. We talk to them frequently. They are aware of the technology and what it can do. We remain on standby and have offered to support DOE when the timing is right to implement what our technology has to offer and supplement the current strategy with DFLAW as well. We obviously have tremendous confidence in the solution. We've demonstrated that it works in Phase 1 of the TBI program. We've been doing this kind of work for 30 years. As you know, we just celebrated our 30th anniversary last month. In addition, the National Academy of Sciences and other independent scientific groups have recognized grouting, which is the basic premise of our technology, as a viable solution and an alternative or a supplement to vitrification as a whole. So we're hopeful that DOE will evaluate this as an alternative. But right now, we haven't received any confirmation they want to move on anything, particularly associated with this new tank leak that's been in the press.

This is a new tank leak. The tanks have been leaking for years, as I understand it. Is that a correct statement? This is just the latest issue.

That is my understanding. Yes, this is not the first tank leak, that's for sure. And they will continue to leak. So yes, this is not anything new. It's just another data point from what I understand.

Mark, thank you. Ben, hope you do the best. Thank you again.

We will take our next question from Ryan Hamilton. Please go ahead.

Good morning, everyone. Could you touch a little bit on your backlog and maybe break out what's Services and Treatment?

Sure, Ryan. Ben is located in Atlanta, so we're not sitting next to each other. But for the most part, our Services backlog is just under $15 million, I believe, Ben, as we're sitting right now overall, and closer to $7 million on the Treatment Segment. Is that right, Ben?

Yes. The number I mentioned, Ryan, was only for the Treatment backlog. Mark is correct; the Services backlog is approximately in the $14 million to $15 million range.

Is your backlog stable? Are those contracts cancellable or not? What are you observing?

No, they're not really cancellable necessarily for Services. They're finishing up projects. We have a couple of projects in California that are ongoing, Canada as well, as many smaller projects around the country. And those are going to continue to roll until they're done, until the projects are completed. Limited changes are associated with those overall, and that number should move much. It could always move some. We could finish some projects early. Sometimes the clients change the scope a little bit here and there; that could happen. But for the most part, they're pretty solid, and we're comfortable with those through Q2 and into Q3 as well.

Sounds good.

And just to add, the Treatment backlog is waste on hand. It's a true unearned number. We've already received the waste, and it's awaiting processing.

Okay. I appreciate the color. Along those lines to backlog completion and as business continues to expand and improve after COVID, are you seeing any other constraints that may prohibit growth or get in the way of completion?

No. The only thing I guess could be said is one thing we didn't anticipate. We knew they were going to generate a lot of waste during COVID. Things just aren't happening. If you go to some of the sites and talk to the sites, there's still very limited visitor access on-site, let alone subcontractors. There's just not a lot happening. It's starting to pick up now. DOE has a plan for getting to full operations through the summer. I'm not sure exactly the details associated with that. But what has been a surprise is how many bids haven't been awarded. That's what we really counted on: more awards, more task orders to be awarded now. But since they're not in the field, they don't want to mobilize the field. That's continued to be pushed out. They're piled up. They haven't been canceled, but the bulk of these procurements are all waiting for the government and commercial organizations to make announcements. That's got to start happening soon. I'm hoping before the next call in three months, we can announce some wins and some backlog by the July time frame.

Sure. That's great. Could you touch a little bit on what you're seeing in the bidding environment? Are there larger numbers or better? Is it driven by price or what you guys can complete at a certain time? Could you touch on that?

Yes, Ryan, that's a good question. On the Services side, typically four or five bidders on most of these; there's different teaming relationships, different skill requirements. We've been on several that have less than that, and some that have more. So it's all over the place on the Services side of the house. As far as costing on the waste treatment side of the house, we have seen a slight reduction in cost. In other words, we have to be more aggressive. Very little waste out there. We don't have a lot of competition. There's really only two other alternatives, and that is typically going directly into disposal. We’ve maintained our pricing fairly flat overall. The competition is pretty much the same. I do think, compared to our competitors, we've been able to get more bids out. I mentioned, we have a real machine for producing these proposals and integrating our technical staff from projects into the proposed development process. I'm proud of our team. We work around the clock, weekends, and nights for months to get these bids put out. They're just now starting to slow down the next couple of weeks, but we expect task orders to start coming in through ID/IQ contracts in the next few weeks as well, which are smaller, faster-turn, and quicker starts. So that will support our summer and hopefully help with getting back to normal. Just a little bit of difference in costing, but not a significant amount overall.

That's great. COVID aside, are there any other issues regarding winning new business? Is there any competitive disadvantage that you're seeing?

No, nothing to really speak of, Ryan. Overall, I can't say there's any real change. It is difficult to address that question because we haven't seen the awards yet. We've been to a lot of bidding but haven't seen a lot of awards. Statistically, I can't say how we've done or how anyone else is doing relative to addressing your question. By the next call, we'll have a good sense of how to answer that, for sure.

Yes. I'm excited to see the proceeds from all your hard work and the team. I guess I just have one more. Could you touch a little on the international business, what you're seeing as far as volumes there?

Yes. I think I probably mentioned that last quarter. We're really excited about the international opportunities. We received our first shipment – actually our first very large shipment from Europe in January, and we have more coming behind it. There have been some verification processes required for that type of work to verify procedures and provide QA/QC regarding what we're doing. Once that's all done, then the gates kind of open. We expect to start seeing a couple of million a year as a baseline shipment, specifically from Europe. We also expect to see some from Mexico and continued shipments from Canada. We see that market opening up for us. Our incinerators are unique up in Richland and can handle and provide high-value waste treatment services to Europe. It’s not as crazy and expensive as you might think to ship it there. So it works pretty well. Once we start to do more and more, I think that Europe will see that it's cheaper to ship it over there, treat it, and then send back what you treat, along with the residue that has to go back over there. It's in a stable form that can be stored very cheaply and as volume reduced by up to 90% or more. There's a lot of value in it, and I think we'll start seeing that happen more with European clients as the word gets around that this is a viable option.

Sounds good. I appreciate you taking the time to answer my question.

We will take our next question from Chuck Dickinson. Please go ahead.

Good morning, guys. Could you also clarify for me? I have written down here. You said the intrinsic value of the plants, I guess that's four treatment facilities now with the EWOC, you thought because it'd be very difficult to replace would be something like $50 million each on average. Is that correct?

Yes, Chuck. It's really challenging to estimate the value of those assets. We wanted to emphasize this in the call, as it serves as the foundation for our future and helps maintain some stability with those assets. It's nearly impossible to replace these plants, and assigning a specific value to each plant and its associated permits is very difficult. The EWOC is not currently valued at $15 million. We are in a special lease-to-own arrangement with the previous owner. It is permitted for radioactive materials processing and we are seeking additional permits to enhance our ability to support Oak Ridge specifically in mercury processing. Therefore, it does not have a $15 million replacement value yet when compared to the others. The other facilities are well-equipped with various technologies and permits that provide flexibility for different operations. The EWOC has not reached that level yet compared to the other three plants.

So maybe rather than the dollar amount, it's more an academic exercise or an exercise in theory to say what the time would take to build the plant, to get it permitted and approved, to have the patents and the technologies and technical personnel to do it. Maybe just as important is how long it would take to do that as such a significant barrier to entry that you're talking about 5 to 10 years to even consider getting into this business. So it's really just a message saying, hey, this is a really difficult business to get into, and it's probably not going to happen.

That's exactly the message, Chuck. The barrier to entry is very, very high, and it bodes well for the future of the company.

The allocation rollover from 2020 to 2021, the fiscal year, the government ends in September. So we're about three quarters of the way through 2021. With that money that does not come into 2022, given what's going on with COVID, although you're starting to see things picking up maybe by June, certainly in the summer, it looks better. Could that money from 2020 that does not roll in or if it does not roll into fiscal 2021, could it roll into fiscal 2022 and likewise, could any unspent money allocated for 2021 roll into 2022?

That's a great question, Chuck. Typically, the department can allocate their unspent funds from 2020 throughout the current year. Regarding the backlog or excess from 2021, it should follow a similar process once they pass a budget and if they avoid continuing resolutions, which complicate matters. They will be able to spend that money in 2021 as well. However, we are experiencing some delays. For instance, we’re seeing very few shipments from the plateau contract in Hanford due to their ongoing transition, which has greatly slowed down operations. We expect continued delays in shipments from Hanford for at least a couple more months, and this will impact us. Nevertheless, we are confident that they will work to catch up on missed shipments. If they do, we anticipate significant shipping increases, and we are prepared to add double shifts if necessary in the third and fourth quarters. We’re optimistic about this outcome. While I can't make any guarantees, we hope that once shipments resume at Hanford, things will return to normal and they will catch up.

Yes. So as an investor, should I be focusing on the $7 million of treatment backlog? Or should I be focusing more on the sort of unstated backlog that's out there, that's not in hand necessarily, but that's been pushed to the right, I guess, if you want that expression?

It's challenging for me to respond, Chuck. I believe that the $7 million backlog will keep us busy and generating revenue throughout the quarter, ensuring we have income at this moment. Typically, we plan about three months ahead. Therefore, we expect to utilize that $7 million backlog within the next three months. As an investor considering this, I would be interested in understanding the future landscape regarding waste generation and whether the government is resuming field operations to produce the waste we handle.

Okay. Last question, you stated or Ben stated that the PPP loan remains unforgiven. Are you still in the process of trying to get that forgiven?

We are. Our entire application for forgiveness was completed in October. As many of you know, they advertised 90 days to get the forgiveness done and we've heard nothing. We make attempts to find out information. The banks have seen a lot of smaller $2 million loans get forgiven, very few of the larger ones, although I have been hearing lately, a few bigger ones are starting to move. It may just be a matter of they were more focused on doling out the new dollars and less on the forgiveness, but we're optimistic in the next 3 to 6 months, it will happen.

Jim, are you there? Your line is open.

Jim Godfrey. How are you doing today? Really excited for the additional color that you've provided today. Looking forward to the press release, as you referred to later on today regarding our new Board member, that certainly welcome to say the least, sounds like it makes a lot of sense from many perspectives. That's wonderful. A couple of other things that may be even taking it a step further than you already have, up at Hanford, there's been, of course, the overwhelming news of the leak less amplified, but I think equally important and wanted to get your color on. On April 27, the Office of Environmental Management put out the release that Hanford moves a step closer to tank waste treatment. To that extent, they're certainly talking about the TSCR platform. Is that really necessary if we're ever to get to large volume deliveries? This phase of that construction is finally completed? How does that affect your vision as far as volumes potential going forward if things come in our direction?

Well, that's a great question, Jim. I mentioned in the talk, and I think I mentioned in the follow-up question from Howard about the whole extraction process and the fact that we're really talking about treating low-level waste. When they pump it out of the tank, it's actually pretty hard. It requires treatment when it comes out of the tank to remove the cesium and iodine from the liquids that are coming out. That is what we call the pretreatment, which is done by what you referred to as a TSCR, tank-side cesium removal system. This is a critical component to have that system fabricated, as I mentioned in the script, and up and running, and it is. They're using a similar system in Savannah River as well. So that tees up the ability of the Perma-Fix treatment approach to handle this waste. That system can pump and treat. The ability for that to support our treatment program is one step closer to large volume waste transfers to either Perma-Fix or to the DFLAW plant and provides DOE with alternatives. It's an important step forward to get that fabricated, installed, and running.

Right. And then to the extent that you just mentioned the two ways that it can get shipped, there's really nobody else permitted in place approved. If everything continues to obtain final permitting to treat the waste, we're really in a unique situation here. Aren't we really about the only option that's really ready to go right now, should the decision be made to start treating some of this waste in larger scale, provided we continue on with the successful demonstrations with the TBI?

Yes. We are the only option outside of the plant. The DFLAW facility is the current strategy for DOE, and we remain behind them on that. That plant will run from what I understand at about 1 million gallons a year. We can do that right away as well and expand to several million gallons a year. We'd like to say that we're supplementing their current strategy for the 2023 time frame. But for this tank, my understanding is that it would not go to DFLAW. The infrastructure is not in place to send it there. So that makes it an even more prime candidate for potential off-site treatment because the infrastructure to go to DFLAW for that tank's location is not in place at this point. It would be a great option to send it to us if the DOE saw that as a viable option.

Great. We have an interesting joint venture with Veolia and this new GeoMelt Vitrification System that we're currently awaiting final permitting for. How does that impact our overall offerings at that facility? Do you see opportunities to potentially add more GeoMelt facilities in our other locations as we move forward?

GeoMelt will not address the tank waste directly. Our relationship with Veolia is strong, and we are currently awaiting the permit from the state. Our General Manager and Executive VP for Waste Operations are actively engaging with the state to expedite the process. The initial step involves a treatability study, which we have already completed with the waste we have processed. We are seeking to get this permitted so we can begin accepting more sodium waste specifically from Idaho. We are optimistic about receiving this approval before the year ends, although there have been delays. Obtaining permits from the state is a lengthy process, and we are in regular communication with them, holding meetings every month to advance the approval. We have also discussed additional locations and processes with Veolia, but this particular project is the closest to securing the necessary permits. We have managed to treat a significant amount of waste through this system, but we are currently at a standstill until we receive state approval.

Sure, sure. But of course, you wouldn't have gone through all this process unless you had some reasonable assurance that you'd be able to get it approved. It's still the bureaucratic process that you're working through, correct?

That's correct, yes.

Yes, good. Now, I want to touch on a couple of other topics without taking up too much time on this call. One thing that hasn't been mentioned is that the Board of Directors has decided not to continue with our poison pill. I've noticed that many investors have expressed concerns about poison pills. Was this decision a gesture from the Board? It shouldn't be interpreted too deeply. We're not looking to sell the business or anything like that. I just wanted to give you an opportunity to discuss this a bit more, and I see you're making significant efforts to unlock hidden value here. Is it fair to say that this is another gesture to support that effort?

Well, Jim, yes. I wouldn't read too much into it either, but I will say this is that the poison pill was justified by the Board based on the company's conditions at the time. A lot of factors went into that and many considerations and thought went into that. Those conditions have changed, and several of them have to the point where the Board looked at the need for the poison pill and recognized that those conditions have changed and they could not renew it. I think it's pretty much what happened with that.

Sure, sure. And I'll just finish up with two quick final points. One, you talked about the tremendous quality of the group of professionals that you've assembled to complement who is already there over the last two years. I know on your website, there are several job openings. You're really confident here as far as your ability to attract and build this organization with engineers, physicists, and talent industry experienced professionals. Where do you see that going? We basically have the right mix of professionals in the organization now. Going forward, don't we have just a huge amount of capacity without really having to invest a lot in terms of CapEx in all of our facilities? They’re ready to go, and the capacity is astronomical. The brain power is astronomical. Given the bidding that you're currently involved with, can you really come out and say that by 2022, that's going to mark a new paradigm in Perma-Fix and that our growth is going to continue? The right components are in place, and we should be flowing a lot of profits right to the bottom line as these volumes get to this next paradigm of volumes for the company? Overall, it's extremely exciting. Do you kind of embrace that? And again, share those thoughts and maybe just offer any other color that you might regarding what I just shared.

Yes, Jim, as an investor and someone involved in the market, I have dedicated a significant amount of time to analyzing stocks and related factors. A key aspect that everyone considers is the leadership team. A strong leadership team can navigate challenging times and create an inspiring vision for future growth that positively influences your stock. Over the past three years, our focus has been on attracting top talent, integrating them into our management team, and driving innovation that aligns with market trends, including waste generation and emerging fuel projects. We believe that our work is strongly tied to the radiological aspect. Most of our projects predominantly involve the radiological component, and we have developed expertise in executing final releases and license terminations for radiological facilities. We have achieved nearly 100 such projects, while most companies have completed very few in terms of releasing projects back to the public or private sector. We are devoted to this focus and expect such project completions to become increasingly essential. Currently, we are bidding on two or three jobs that highlight project closure. We have assembled a capable team around this initiative, and we are seeing positive growth in that area. It is unfortunate that the COVID situation has hindered our momentum and resulted in challenging quarters, especially as we wrap up projects while new ones are yet to begin. However, we are confident that our momentum will return. Our clients have many upcoming projects, and once task orders begin flowing through our ID/IQ, we anticipate renewed momentum with our current management team. We are genuinely excited about this outlook. Without our effective management team, my confidence in our ability to navigate both sectors with flexibility and resilience through this temporary setback would not be as strong.

Great. The guidance that you've provided today is wonderful, Mark. I can't think of no, but especially you shared, I think for the first time, kind of a couple of hundred bucks a gallon potential at Hanford and the ability to, if things go our way, create several million gallons annually. You're really creating a vision for the company that currently is at $100 million in sales, call it. There are many hundreds of millions of dollars in sales potential as we look into the future with margins that are astronomically better than we've ever experienced. Such a tremendous vision, and I can't thank you enough for sharing that vision. I wish you the best of success as you continue to execute and move towards those long-term objectives. Thank you for your time.

Great. Thanks, Jim.

It appears we have no further questions at this time. I will now turn the program back over to our presenters for any closing remarks.

All right. Thank you. I'd like to thank everyone for participating in our first quarter conference call. As mentioned earlier, we remain extremely bullish on the outlook for the full year. We appreciate the continued support of our shareholders and look forward to further updates as developments unfold. Thank you.

This does conclude today's program. Thank you for participation. You may disconnect your line.