Greetings, welcome to the Perma-Fix Environmental year-end 2015 earnings conference call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would like to turn the conference over to your host, Mr. David Waldman with Crescendo Communications. Thank you. You may begin.
Thank you, Matt. Good morning, everyone, welcome to Perma-Fix Environmental Services' fourth quarter 2015 conference call. On the call with us this morning are Dr. Lou Centofanti, CEO, and Ben Naccarato, Chief Financial Officer. Company issued a press release this morning containing fourth quarter and year-end 2015 financial results, which is also posted on the company's website. If you have any questions after the call or would like additional information about the company, please contact Crescendo Communications at 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 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. 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.
Thank you, David, welcome everyone. Very pleased to report that we achieved $7 million of adjusted EBITDA, which is at the top end of our guidance. It's almost double what we reported last year, as we look forward, we're on track for another very strong year, or stronger year, in 2016. As you know, we've been very focused on continuing the growth and improving the profitability of the company. As we look to 2016, we see continued significant improvements in both the treatment and the service segments. The likelihood of entering some new exciting markets that we will discuss later in the call. I'd like to also point out that had it not been for our medical subsidiary, we would have shown positive income from continuing operations.
Since we are the majority owner of Perma-Fix Medical, we must consolidate the financials even though this entity is independently funded. We're making tremendous progress on our medical subsidiary, which I'll discuss in more detail later in the call, and Ben will give more color on the financial impact of our medical subsidiary. Turning first to the service segment. Happy to report revenue increased 43% in the fourth quarter to $5.5 million from $4.4 million from the same period last year. We see continued growth in our service segment, which provides a very predictable revenue stream. Moreover, we see significant opportunities here as we continue to build our resume. At the same time, we are in a much stronger competitive position as the market continues to consolidate and weaker players have exited the market.
As an example of our recent success, we were selected by the Navy as a part of a winning team on the $240 million five-year contract for environmental remediation services at various Navy installations. We are acting as a subcontractor on this award to CH2M Hill, the prime contractor of the project. CH2M Hill selected to work with Perma-Fix through our close working relationship and the fact that we're uniquely qualified in terms of characterizing, remediating, surveying radioactive material impacted sites. With our vast waste characterization and treatment knowledge and experience, we're able to provide a comprehensive solution for site and environmental remediation projects, including turnkey radiological services from characterization through decommissioning, decontamination, and final status survey. While we can't provide the specific dollar amount to Perma-Fix on this contract, suffice to say, in a typical contract like this, we anticipate about 15%-20% of the total project award.
This is just another example of the many opportunities we see going forward in our service segment, which has continued to do better and better over the last year and a half. Within the treatment segment, revenue declined in the fourth quarter compared to the same period last year, but this was due in large part to the timing of certain large waste treatment projects that were pushed out to later in this year. We expect to receive these shipments in the second quarter, which should boost our treatment sales beginning in the second quarter, and we expect a very strong remainder of the year in treatment. To that, though, I would point out we do expect some weakness in the first quarter due to these delays.
Nevertheless, we have improved visibility primarily as it relates to government spending and commitments by the government in terms of waste shipments that they anticipate sending us over the next year. Thus, we anticipate solid growth in both our treatment and service segments in 2016. At the same time, the opportunities outside DOE continues to be encouraging as we continue to focus on commercial and international that will help diversify our revenue. In addition to our low-level mixed waste treatment business, which we anticipate will grow in 2016, we see emerging opportunities in the high-level area, which represent an even larger potential market opportunity. For all of you who have been following us for years, you know this has been one of our, and my, top priorities, is moving into high-level waste streams where there are no available treatment options.
The market for these waste streams, excuse me, dwarf anything we have done in the past. Importantly, we believe we have the technology, permits, and facilities in place to treat a variety of high-level waste streams. Turning now to the medical side of business. We continue to make progress on the regulatory front, as well as putting the company on a more solid footing from a capital markets perspective. We are considering a variety of options that will bolster the strength of the subsidiary, including both strategic and capital market options. We now have the required management and regulatory expertise in place, and the feedback from within the industry, from both distributor and end user, has been extremely positive.
To wrap up, we remain very confident in the outlook for 2016. In 2015, we saw adjusted EBITDA nearly double. For 2016, we anticipate continued growth in both treatment and services. With any luck, should make headway in treating high-level waste streams, which could be a true game changer for our business. At this point for 2016, as I said, we'll improve on 2015, and it will be much better, but we will provide more detailed guidance on our first quarter earnings call.
I'd like to now turn the call over to Ben, who'll go into more detail on the numbers, and then I'll be back to answer questions at the conclusion of the formal remarks. Ben?
Thank you, Lou. I'll begin with revenue. Our total revenue from continuing operations for the fourth quarter was $15.1 million, compared to $17 million fourth quarter of 2014, a decrease of approximately $1.8 million or 10.8%. Our total revenue for the year ending December 31st, 2015, increased by $5.3 million or 9.2%. Our service segment increased revenue by $1.1 compared to fourth quarter of 2014. That was offset by a drop in our treatment revenue of $2.9 million. Our service segment continued to show modest growth in the fourth quarter when compared with prior year, and we continue to win our share of the smaller contracts. For the year ended 2015, our service segment increased by $6.3 million or 43% compared to 2014. Now, this difference includes approximately $2 million of revenue in 2014 that our engineering group had, which we sold in 2014.
Excluding this loss, our service segment actually increased by approximately $8.3 million or 56%. Our treatment revenue did decrease, as I mentioned, by $2.9 million or 23.5% in the fourth quarter, and this was from reduced volume. The reduction was a result of, as Lou mentioned, a few delays in some pretty sizable shipments, which were only delayed, and we are expecting them in the first half of 2016. For the entire year, treatment segment was down $1 million or 2.4%, as again, this impact of these shipment delays resulting in a shortfall against prior year. Turning to our cost of goods sold. Our total cost of sales for the fourth quarter were $11.2 million, compared to $12.3 million for the same period last year. Our cost of sales from our treatment segment decreased by $1.5 million or 17.7% from the fourth quarter of 2014.
Lower revenue for the quarter resulted in lower variable costs of approximately $1.1 million, but we also saw reduced fixed costs at our facilities of approximately $438,000. Our service segment cost of sales increased by $440,000 or 11.5%. Most of this cost increase was related to the increased variable cost from higher revenue with very little increase in our fixed costs. Our cost of sales for 2015 was higher than the prior year by $2.9 million or 6.4%. Variable cost increases in service segment related to increased revenue offset reduced costs that we saw from the treatment segment, which, again, was associated with lower revenue and lower fixed facility costs. Turning to gross profit for the quarter. Our gross profit was $3.9 million or 25.7% of revenue, compared to prior year, $4.7 million or 27.6% of revenue.
Our gross profit from the service segment increased to $676,000, as the increased project revenue and improved gross margins contributed to the improvement. In the treatment segment, gross profit was down $1.5 million due to the revenue shortfall, but offset by improved revenue mix and lower facility costs. For the year, our gross profit improved by $2.4 million versus prior year, as both segments improved compared to the prior year, with service segment improving by $2 million. Our G&A costs for the quarter were $2.3 million or 15.4% down from $3.1 million or 18% of revenue last year. Improvements related to bad debt recoveries were partially offset by higher bid-related marketing and administrative expenses. For the 12 months ended December 31, 2015, our G&A costs were $11 million or 17.6% of revenue, which was down about $1 million from the $12 million or 20.9% of revenue from prior year.
Income from our continuing operations for the quarter was $259,000 compared to $741,000 in the prior year. Increased spending on research and development of $427,000 made up most of this reduction, with the majority of the increase related to our development-stage medical business. Income from our continuing operations for the fiscal year 2015 improved over prior year by $3.1 million, despite an increase in our research and development spending of $1.4 million, again, related to our R&D, our development-stage medical business. Our income applicable to common shareholders for the quarter was $97,000 compared to last year's income of $875,000. For the year, the loss applicable to common shareholders was $1.1 million compared to a loss in the prior year of $1.2 million.
As we mentioned earlier, consolidating our results from our development-stage Medical segment was the main reason for the loss, which has the net impact to our loss from this segment was $1.2 million and $680,000 for 2015 and 2014 respective issues. Our income per share for the quarter was $0.01 compared to income per share of $0.08 last year. For the year, our loss per share was $0.09 compared to a loss per share of $0.11 in the prior year. Our adjusted EBITDA from continuing operations, as defined in this morning's press release for the quarter, was $2.5 million, consistent with last year's $2.5 million in the fourth quarter of 2014. For the year, our adjusted EBITDA came in at $7 million compared to $3.7 million in 2014, an increase of 87.6%.
Turning to our balance sheet, our total cash and cash equivalents decreased by $2.2 million. Our cash required by our discontinued operations and net cash used in our Medical segment were the main reasons for this drop. Total current receivables were down $1.2 million, primarily due to the impact of the delayed shipments in our treatment segment in the fourth quarter. Other current assets increased approximately $1 million related to facility-related prepaid expenses. Our current liabilities from continuing operations were down $3.6 million, mostly due to our lower unearned revenue and waste backlog. Our backlog was $4.7 million at year-end 2015 compared to $9.2 million at the end of 2014. Our current liabilities from discontinued ops decreased $1.6 million, primarily from paying down payables related to our 2013 facility fire at our Georgia facility. Our total debt is at $10 million at year-end.
Our lender, PNC Bank, making up $9 million of that debt. We also had working capital of $3.1 million at year-end, up considerably from $372,000 at the end of 2014. Finally, I'll give you some cash flow activity for the year. Our cash provided by continuing operations was $1.7 million. Our cash used by discontinued ops was $2.9 million. Cash used by investing activities was $492,000, consisting of capital spending of $623 and reduced by proceeds from some small asset sales and escrow receipts from our 2014 sale of our engineering firm. Cash used in financing was $490,000, consisting of debt payments of $3.8 million and offset by equity raised by our Medical company of approximately $1 million, and an increase in our revolver debt of $2.3 million. With that, operator, I'll now turn the call over to questions.
Thank you. We will now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you wish to remove your question from the queue. For assistance using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we open for questions. Our first question comes from Evan Greenberg from Lincoln Capital. Please go ahead.
Hey, how are you guys?
Hi, Evan. How are you doing?
Good.
I wanted to know, I was very happy with the services number, I guess that's a better harbinger of things to come than the volatility on the actual waste numbers. Do you see that business continuing to strengthen as part of the new agreements, are the services revenues going to be increasing along with that also, the gross and net margins on the services side?
Yeah, I'll give you an overall view first, is we've continued to win a lot of smaller contracts or unannounceable contracts. That group continues to do well and is growing, we've got a fairly full pipeline right now in terms of projects that we're bidding on. We expect to see continued strong growth in that group over the next year, with that comes improved margins.
With the unannounceable contracts and the announced contract that you recently announced, you announced one. Are you able to have visibility for this year? You could've put out a forecast or a baseline or approximate baseline. Even though you know certain things haven't hit yet, it seems like you've got enough contracted volume to say the 2016 is going to be a year of growth for the company.
I thought we did. We said we see 2016 growing. To give actual numbers at this early stage, with the lumpiness of the waste side, we'd like to get into the first quarter, at least past the first quarter, then be able to talk about the overall. The waste side has such a dramatic impact on the profitability of the company.
Sure.
Right now is from standing orders, it looks very good for 2016.
Okay. We probably anticipate the growth rate to be better than 2015 is what I would expect. Also, just one last question having to do with Perma-Fix Medical and the progress that's been made there. You've been putting a lot of money into Perma-Fix Medical. I guess your expectation is that could continue for another year or so, and when do we see the value appearing for those shareholders? I know you have a lot going on there.
Yes.
You've discussed it as well previously.
We have a lot going on, it will continue to be basically a cash drain for at least a year and a half, two years. We continue to see that, but it will also be funded by itself. Yeah.
Good. Thanks a lot, Lou.
As a reminder, if you'd like to ask a question, it is star one. Our next question comes from Sam Lebowski from SER Asset Management. Please go ahead.
Yeah, good morning, Lou.
Good morning.
I want to bring up this interesting development where Kurion was acquired by French giant Veolia for a $350 million-$360 million valuation. I'd like you to address how your treatment, as they're working on Fukushima, I'd like to address how your treatment differs from theirs. Is there any patents that you have that may infringe on yours or vice versa? Is it of value to set up a committee to explore any type of potential transaction with other companies based on this valuation, where Perma-Fix, in this area, has such a low valuation?
Well, it's been an interesting couple of months in the industry. You've seen two very dramatic events. One has been Veolia making an offer for Kurion at about four or five times revenue. Basically, Kurion has two things. One is they have water treatment contracts at Fukushima, where they've done very well with basically using technology that is basically non-proprietary. They have a vitrification technology that has contributed very little to their revenue, and then a service group that does basically service work. The second has been EnergySolutions has made a tender offer for Waste Control Specialists, the other landfill in the industry, at about a very similar valuation, about $400 million, and that's probably 10 times their revenue.
You're seeing valuations right now, and you're seeing the industry going through some very dramatic consolidation with some major players, and we think that will continue, and we think you'll see valuations continuing to stay up there. As we look at it, I think it's going to be a very interesting time for the industry as we go through these consolidations. I think we're in a very good spot. We probably have some of the best assets in the industry in terms of value. I've said this over and over, we could take almost any one of our facilities, and it would have a tremendous value in terms of replacement value, and also in terms of the opportunities that now exist out there. We're very excited about the industry, and we think there's some great opportunity here.
As for a committee that you mentioned, our board has a strategic committee that is constantly exploring what the best options are for the company in terms of from a strategic point of view.
I assume we haven't had an offer. Is it worthy to hire an investment banker to speed up the process based on the fact there is this significant interest now and to sort of get an appropriate valuation for Perma-Fix for this part of the business?
As I said, the board has a strategic committee, and it has involved bankers over the last several years, several times, and continue to look for ways to explore various options. That's been going on fairly constantly, so through that strategic committee.
Okay. Let me ask you something on this. You say that the deferred contract, which that's going to be in the first quarter. It's March 22nd. The quarter ends March 31. How much the dollar amount that was deferred that's going to be in this first quarter?
Most of it is going to be received in April.
In April?
Yeah, we were kind of careful to make sure it was in the second half of the year or in the second quarter. We said it would be received in 2016. First quarter is going to be light because a lot of this stuff is all scheduled for April. It's going to get pretty aggressive in the second and third quarter.
Are we able to quantify the amount of this deferral for the second quarter?
It was actually a few shipments, probably a handful of shipments all worth, I'll just say over $1 million a shipment kind of thing. It kind of caved the last quarter a little bit on the treatment side. What we've seen in the business, what is happening is that, one, DOE's budget has improved. I probably have said this in the past, but one of the effects of an improving budget is they go through a reprogramming process, which actually starts delaying things. As we sit today, we have several sites that now are in, I guess you'd say, in trouble under their consent decrees because they've delayed shipments, and they are backing up. We expect a very good year this year because of the requirements they have for the primes to get their fee and for the Department of Energy to meet its goals.
What we see coming is pretty significant for the year.
Okay. Now, the Navy contract, does that have to be funded? When is that supposed to begin?
It's already started, and no, it's been funded, and the money is there, and we're starting to populate that as we speak.
Revenue is being hit in this March quarter or in the next quarter?
No, it'll start probably the middle of the year here where we'll actually recognize the revenue.
Okay.
Start recognizing revenue.
All right. Thank you, Lou. Good luck.
Okay.
Next question comes from Bill Chapman from Morgan Stanley. Please go ahead.
Yes, good morning.
Good morning, Bill.
Hello. I've come across several articles at Northwest Publications where there's a more and more uproar about the Hanford and delays on treating that high-level treatment. These folks are talking about possibly getting some of that work back, I presume, when you mentioned high-level treatment.
Well, our Hanford and our Richland facility is one of our main high-activity facilities. It's the facility that can take TRU waste. It's a facility that has the licenses and permits to take fairly high-activity materials.
We see great opportunities there. As you know, I've always said at the Hanford operation, there is a tremendous amount of waste there that needs treatment. We have the technologies where I've talked about we can provide an alternative there and a supplement to the waste treatment plant that's being built. We're continuing to pursue those. I'm as optimistic as I've ever been that we could see some movement here in the very near future. I compare it to how it worked with TRU waste. If you go back in our history, and look at the announcements, we hardly ever said, "We got a contract to treat TRU waste." What really happens in those cases is it builds up. They give you a bottle, then they give you a truckload, then they give you a trainload.
During those periods, it's hard sometimes to even announce what's going on, that they occur very gradually and somewhat under the radar. What I think might happen is very similar to what happened with the TRU waste. We one day started treating TRU waste, the next thing you know, today it's one of our biggest revenue streams coming into our facility in Richland. Very optimistic we'll continue to move into higher activity materials, and hopefully see some progress here in the very near future.
Okay.
Right now we see great opportunities out at the Hanford site.
Okay. Is that cleanup site now I know it's a substantial amount of cleanup work. Is this the project that would take years and years or decades to clean up? Just give me an idea about.
Well, they.
The situation that's there.
I guess I would just give you the latest forecast by DOE that they're not even going to be able to start the vitrification plant till 2038. You can imagine the opportunities that are there to provide some backup services. Right now, you're looking at, yes, decades of work once you start.
Okay. Let me ask you on the Tc-99. You mentioned you're going to have expenses going out year and a half to two years and, but you're talking to partners about starting to have them do more of the work. Is that taking that into account? You'll still be sharing expenses if you go a partnership?
Well, remember how it works is that-
Okay
it's a freestanding subsidiary, but we own over 50%, and we'll continue to own over 50% through the near future. As long as we do that, we must consolidate their numbers, which will always be losses. That's why we've tried to do the adjusted EBITDA, so that you really can see through what our number is and how well our base business is doing, so that it takes that medical expense out of the number. That's why we've tried to do the adjusted EBITDA, that gives everybody a better view-
Yeah. Okay.
of where we're going and how we're doing.
Okay. Are you still testing it out to complete the whatever requirements you have to come up with on following with the FDA?
Yeah. Where the company is today is it is much more in the collecting of data stage for the FDA. Now, we have verified the process. We're very comfortable that we have a process that produces quantities of Tc-99 that can be used commercially. Now it's a case of going through the various steps to collect data that would be acceptable to the FDA under FDA standards. It's a process that's somewhat, I guess I'd call it boring because you're basically doing very detailed tests for the kind of data the FDA needs, and hard to talk about exactly the kind of progress we're making. Everything's on track, and we're moving forward.
Okay. One last question on developing a partnership with a company that's in this business. Are you hoping to have some kind of arrangement by, let's say, this summer?
Well, it's possible. We're talking to a variety of strategics right now. There's a lot of interest, as I've said. Whether we can get to a partnership or not at this point, I hope so and optimistic. Hard to guarantee it at this point.
Okay. Well, thanks for the update. It's frustrating. We're getting the cost is penalizing our earnings. We're not getting any kind of evaluation premium for what you have there. Hopefully something can change on that. A partnership will probably be that factor.
Well, we're optimistic with as it's developing here, that hopefully we'll see a better valuation on the medical side, which will help Perma-Fix in the end. Right now, we think it's totally unrealistic. It's a very illiquid market for it in Poland at the moment. That's one of our main focuses, how to improve that liquidity.
Okay. Well, thank you very much, Louis.
Our next question comes from Douglas Dyer from, well, actually, the Department of Energy. Please go ahead.
I have two parts to my question. First, you've mentioned that you have the ability to treat the high-level waste. What is your capacity? Do you have capacity to handle what may be your expectation? Second of all, with regard to the waste that's at Hanford, what % of that waste can you treat?
I'll give you my answer to that, is that the waste treatment, we could treat fairly significant volumes very quickly. We could probably, as we see it today, pretty much take, you've got 150 tanks of waste, and they're all slightly different. As we looked at those tanks from an activity point of view and a constituent point of view, there's a large majority of them we can take today, and pretty much, I won't quite say as is. We would have to do some pre-treatment prior to taking them, which would be not real difficult. If you do that simple pre-treatment, I hate to give you a number because we could probably take, oh, 70% of the volume, with almost no capital. Maybe $1 million or so just to beef up our radiation protection program or so.
There's a very significant amount of the waste we could take and treat, with some fairly simple pre-treatment that's commercially available before it would come to our facility. That's the kind of thing we'd see trying to demonstrate to DOE in the near future here.
I guess I've always had difficulty understanding why there's such a big urgency to do this, and there is urgency to treat it, but you've got the facilities there. It would just seem like it's such an easy thing to be able to get this up and running. What has been the disconnect? Why hasn't this been able to get started?
Well, I think the disconnect has been they've been very focused on a path forward, which was the treatment plant and getting it up and running. Because of the problems with it, and now pushing it out to such an extent, it has become, I think, just prudent to start looking at, well, maybe there's some simpler ways we can treat some waste here and make progress because they have leaking tanks sitting there. You can imagine what the state and the communities think of those tanks, the longer they sit and the issues surrounding them. I think just from a prudence point of view and a way the plant is, startup has been pushed so far out. It's added a lot of new pressure to try to do something.
All right. It sounds like you're doing some testing for DOE right now?
Well, I wouldn't say we're not doing anything for DOE right now, but we've offered options to them, that they are looking at. Maybe that's how to best put it. We hope we will be doing something for them in the very near future, is the way to put it.
All right. Thank you very much.
Okay.
Thank you. If there are no further questions, I'd like to turn the floor back over to management for any closing remarks.
Once again, I'd like to thank everybody for participating in our fourth quarter call. We have another quarter under our belts and nearly doubled our adjusted EBITDA for the year. I can say confidently we've turned the corner. We're pursuing several large contracts in the service segment, which we hope to announce in the near future, and we see a number of growing opportunities within the treatment segment. Very excited about our prospect for the medical subsidiary based on the interest we received from industry and now finalizing our plans for FDA and look forward to providing additional updates in the near future. I'd like to thank you all for attending.
Thank you. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.