Q2 2023 GSE Systems Inc Earnings Call
Good day and welcome to the GSE systems incorporated reports second quarter fiscal year, 2023 financial results.
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After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.
I'd now like to turn the conference over to Adam Luann Steiner Vice President at Lytham Partners. Please go ahead.
Thank you operator, and good afternoon, everyone and thank you all for joining us today to review the financial results for GSE systems second quarter fiscal 2023 ended June 32023 with us on the call representing the company today are kind of loudermilk, President and CEO of GSE systems, and Emmett Pepe, our chief financial officer of jazz.
GSE systems before we begin I would like to remind everyone that statements made during the course of this call may be considered forward looking statements within the meeting of sex.
27, eight of the Securities Act of 1933 as amended and section 20 <unk> of the Securities Act of 1934.
These statements reflect current expectations concerning future events and results words, such as expect intend believe may will should could anticipate and similar expressions are words that are used to identify forward looking statements, but their absence does not mean statement is not forward looking.
Statements are not guarantees of future performance and are subject to risks and uncertainties and other important factors that could cause actual performance or achievements to be materially different from those projected.
For a full discussion of these risks uncertainties and factors you are encouraged to read Gse's documents on file with the Securities and Exchange Commission, including those set forth in periodic reports filed under the forward looking statements and risk factors section.
He does not intend to update or revise any forward looking statements, whether as a result of new information future events or otherwise on this call management may refer to EBITDA adjusted EBITDA adjusted net income and adjusted EPS, which are not measures of financial performance performance under generally accepted accounting principles or GAAP management believes that these.
non-GAAP figures. In addition to other GAAP measures provide meaningful supplemental information regarding the company's operational performance investors should recognize that these non-GAAP figures might not be comparable to similarly titled measures of other companies. These measures should be considered in addition to and not as a substitute for or superior to any measure of performance prepare.
In accordance with GAAP, a reconciliation of non-GAAP measures to the most directly comparable GAAP measures in accordance with FCC regulation G can be found in the company's earnings release with that I'd like to now turn it over the call to Mr. Kyle Loudermilk, President and CEO of GSE solutions Tayo. Please proceed.
Thank you, Adam and I'd like to welcome everyone to GSE second quarter fiscal 2023 financial results Conference call.
Earlier today, we issued a press release detailing our financial results hopefully you've had a chance to review this news release, but if not a copy can be found on our website at www Dot T. S. Yes, dot com under the news section.
Today's agenda I'll start with a brief update on the industry and the quarterly results.
I will review the financial results and we'll conclude with <unk>.
Q&A session first a brief update on the industry.
Demand for electricity on the National and global basis continues to grow and be in high demand, especially given the higher temperatures that country has been experiencing this summer as a result utilities have been busy making sure. There's an ample supply of power to meet this demand while certain solid fossil fuels are being utilized to meet peak load governments understand that dependence on fossil.
Not a sustainable long term strategy and the value proposition of nuclear power continues to be top of mind.
As a result, many countries continue to prioritize nuclear power through planning and investment to sustain existing nuclear infrastructure investing to produce more power from this infrastructure and they've got some plans to build out a new generation of nuclear power plants. The.
The economics for nuclear are becoming more compelling in light of geopolitical issues. The invasion of Ukraine highlighted the fragile nature of possible feel dependency and increased baseline consumption of fossil fuels, resulting from our growing global economy also puts upward pressure on costs.
That's quite clear contrasts the sustainable and secure power the nuclear assets provide too cheap energy security, while providing abundant affordable power.
Case study of these benefits is being witnessed in Finland with the recent completion of a local leader three nuclear power plant Finland's first new nuclear power plant more than four decades. The power now provides its begun to lower electricity costs in the country, which sort out by the Finnish government bans electricity imports from Russia.
Plant, which will produce up to 15% of the country's powered amount has enabled electricity spot prices to fall by 75% from the beginning of December 2022 to April 2023.
The other country that is seeking to expand its nuclear power footprint is Canada, which plans to achieve a net zero power grid by 2035 to get their utility companies are already preparing with Canadian base, Bruce power announcing assessment layouts to add another 4.8 gigawatts to its current 6.2 gigawatt facility in timber 10, Ontario.
If approved this would be the first conventional nuclear power plant in the province felt in three decades and the site would eventually become the largest nuclear power generation.
Operating site in the World.
The United States has achieved a fantastic milestone recently with southern company's Vogel three nuclear reactor in Georgia now commercially producing power.
The first Newbuild nuclear power plant in the United States in 30 years, and it's created tremendous excitement throughout the industry.
So unit four is nearing completion and expect it to go commercial early next year.
This is a great achievement for southern company and the industry and GSE.
So as I highlighted on the first quarter conference call. If you go onto the control room with these new reactors its complete digital control control room, nothing like the prior generations of nuclear power plants.
<unk> technology is used as a basis for the simulation systems for AP 1000, and we are proud to be part of the journey.
This transformation to digital control rooms will play out in existing nuclear power plants as well as older power plants obtained operating extensions. We believe the industry will go through a transition whereby there's old control systems are going to transition to digital control systems for greater operational reliability safety and to achieve optimal power generation.
Upgrades require investments in the hundreds of millions of dollars for flat and we'll touch upon every service. The GSC can offer from simulation to design modifications to Programmes and performance to workforce solutions. We've had a series of press releases over the past months that highlight recent wins across our lines of business, including a significant one to assist our client upgrade.
Procedures for their plants as they transition to a digital control environment.
Some more color on the recent workforce solutions subsequent to the second quarters, and we announced a contract valued up to $15 million over several several years to support our project to modernize the nuclear power plants main control room to a digital environment.
This contract was with one of the largest nuclear operators in the United States and we are excited to play a critical role in this transformation.
Other plants have announced similar plans to convert to digital controls of all of this hard to determine the timing of future projects. We are optimistic that there are more to be awarded in the coming year or so so its conversion to digital evolves to clear industry trend.
Okay.
As mentioned the conversion to digital controls helps the plant operate more efficiently safely and reliably the investment also help set the stage.
To extend the lifetime of the plants and prepare for future power up rates the means by which existing infrastructure can be upgraded to produce more power producing more power through upgrades is an extraordinarily cost effective means to produce more nuclear power versus building new plants.
Looking a bit further into the future. There's continued momentum around their development small modular reactors known as NASA, Mars, which can be inherently safe to operate while requiring a smaller site footprint than traditional nuclear power plants.
Tomorrow, we'll be the wave of the future and GSE is prepared to participate helping you stupid. So these come safely online.
We recently announced that seeking to improve their nuclear footprint to meet certain climate targets to improve energy security throughout some of ours since large new projects, a very costly British government recently opened to competition to develop some ours is aiming to see them operational within the next decade.
Their stated goals to increase nuclear power capacity to 24, Gigawatts by 2050, which would put nuclear up 25% of electric trustee output versus 14% today it.
It just seems like this that is great for the industry and so as the next wave of plants to be built for the nuclear industry won't Bob's significant S EMR opportunities now.
Now for some perspective on Gse's business in Q Tal in Q2.
Our fiscal year 2023.
The highlight of the second quarter was the meaningful improvement in our operational results.
Hearing teams in particular kept a keen focus on utilization and that's not a direct contribution to improved company performance as the team began to execute on the significant orders won in Q1. The company performed at a high level, resulting in financial improvement when compared to the first quarter and second quarter from one year ago.
While we have more work ahead of US we continue to focus on improving what is in our control, including keeping corporate costs down and ensuring we are properly staffed for the business. We have and anticipate moving forward Q2 orders were lower than we were looking towards due to some key orders not closing in the quarter, but those orders that slipped have close.
In early Q3, and we have highlighted several of those ones in recent press releases. We also took some costs out of the business to ensure we are as lean as possible moving forward and we'll provide more details on these initiatives.
Focusing a bit more on the highlights of the second quarter.
Companys performance Engineering Division continued to improve especially including year to date software and support sales of $2 3 million up from roughly 1.9 million in the same period.
A year ago.
We are very pleased with the continued pace of software sells new orders overall for performance engineering. During the second quarter were $4 9 million, which is an increase of 30% when compared to $3 9 million in the second quarter of 2022, while the order flow has obviously been lumpy from quarter to quarter, we felt that the increase in orders from the engineering.
When compared to the same period, a year ago, perhaps demonstrates a tad under recovery in industry spend in this area, even if lumpy.
Our workforce solutions business continues to experience softness in demand. The segment had revenue that was $3 3 million in the second quarter compared to $3 9 million in the first quarter and Laura from $4 8 million in the second quarter. In 2022, we've worked diligently to retool the division by rebuilding sales and recruiting teams for the business, but it continues strong.
So it's difficult to predict when it will turn.
Genocide of book of business in the marketplace and need to execute the competition is very broad based and in general the industry is still in a wait and see mode buffers central projects such as the digital control project win we highlighted.
We are focusing on staffing up that project as fast as we can but of course. This route depends on the customer readiness to accommodate that perhaps we are closely monitoring the division and prepared to retool if it doesn't improve.
Across the business.
We are focusing on what is in our control and demonstrating improvement we're focused on utilization on hard margin business, we see that in this quarter.
Focus has yielded improved results for the quarter and revenue generation for engineering and overall gross margin improvement in the business. We have been laser focused to contain costs charming overhead, where we can and shedding or reducing external costs, which should have an impact in the second half of the year.
We also are focused on engaging with customers on specific opportunities our business pipeline is strong and while we're not in control client decisions to move forward on projects. We are ensuring we are along with them are ready to execute when projects are awarded.
This focus has helped us build our opportunity pipeline and win a significant new customer logo, the uranium enrichment customer when we announced and that is not an easy thing to do in the nuclear ecosystem I'm proud of our accomplishments and improvements in the second quarter I believe they demonstrate that we are focused on turning this company around while we wish Stefan mentioned the spill.
The faster, we do continue to make progress to reaching our goals of increasing orders and backlog and grow revenue.
New orders already received and announced in the third quarter are a step in the right direction.
I'll now turn the call over to Emmett Pepe G. S E CFO , who will review the second quarter financial results and then please.
Please proceed.
Thank you Kyle.
But the numbers highlighted in detail in the press release, let me focus my comments on a few areas and provide added color where I can.
Revenue during the second quarter of 2023 was $12 4 million a.
The year over year decrease of 3% compared to $12 7 million in the second quarter of 2022.
But sequentially higher by 14% when compared to the $10 9 million in the first quarter of 2023 Andrew.
The engineering Division continued to perform well for the company with revenues of $9 million for the second quarter of 'twenty three this compared to $6 9 million in the first quarter of 2023 and compared to $8 million in the second quarter of 2022.
Orders for engineering performance were $4 9 million, which declined from $14 7 million in Q1 of 2023, which included some sizable orders, but looking year over year orders compared positively by 30% up from last year's $3 8 million in Q2 of 'twenty two.
Also as Colin indicated in his remarks, the company experienced some order slippage during the quarter and workplace during the early third quarter.
Workforce solutions divisions revenue in the quarter was 3.3 million compared to $3 9 million in the first quarter of 2023 and compared to $4 8 million in the second quarter of 2022.
Orders were $1 3 million in the second quarter of 2023 compared to $4 4 million for the first quarter of 2023 and compared to $3 1 million in the second quarter of 2022.
Short fall orders in the second quarter stemmed from early terminations received from some of our clients and the magnitude of one 9 million.
It is somewhat uncommon such terminations can occur depending on the scope of service speed of project completion and other variables if it weren't for the terminations the orders for both the company and specifically workforce solutions would have shown year over year and sequential improvements.
That said the division is still experiencing some resistance from customers, but we are closely monitoring this business and we are opportunistic about the book of business that is available to the marketplace.
Gross profit in the second quarter of 2023 was $3 2 million or 26% of revenue.
This compared to a gross profit of $3 2 million or 24.9% of revenue in the second quarter of 2022.
At $2 4 million or 22% of revenue in the first quarter of 2023.
Gross margin improved over the first quarter due to project mix, including the benefit of our software sales and more revenue coming through the performance Engineering Division, which carries higher margins.
Operating expenses, excluding depreciation and amortization in the second quarter of 2023 were $3 8 million compared to $5 million in the first quarter of 2023 and compared to $4 6 million in the second quarter of 2022.
The year over year decrease in Q2 was in part due to cost containment measures implemented in the first half of the year that delivered benefits in the quarter.
Many of our more significant cost reductions were implemented toward the end of the second quarter, which included facilities savings from our footprint reduction that we highlighted in previous calls vendor savings from negotiated rate reductions and labor savings primarily from our back office. These changes have aligned our operating expenses with our current book of business.
And we anticipate that these changes will contribute to improvements in our operating expenses in the coming quarters.
Net loss in the second quarter of 2023 was a loss of $1 5 million or a loss of six cents per share.
<unk> to a loss of 3 million in the first quarter of 2023 or 13 set for sure.
Net loss in Q2 of 22 was 1.4 million or seven cents per basic and diluted share.
Adjusted net loss was $1.3 million five per share in the second quarter of 2023 compared to an adjusted net loss of $2 6 million or <unk> 11 per share in the first quarter of 2023.
Adjusted net loss totaled $1 2 million or six cents per diluted share in Q2 of 'twenty two.
Adjusted EBITDA totaled a loss of 361000 for the second quarter of 2023, a 1.8 million improvement compared to the loss of $2 2 million in the first quarter of 2023.
Adjusted EBITDA also improved.
Paired to the loss of <unk> 7 million in Q2 of 2022.
Company's backlog was utilized during the second quarter given that the tepid order flow in the quarter and ended at $34 4 million.
Backlog at the end of the first quarter was $40 9 million compared to $34 million at the end of the second quarter of 2022.
Performance Engineering segment backlog was $26 9 million at the end of the second quarter compared to $31 4 million at the end of the first quarter of 2023.
But higher when compared to the same period, a year ago, when it was $27 5 million.
Workforce solutions divisions was $7 5 million at the end of Q2 'twenty three that compares to $9 5 million at the end of Q1 2023 and compares to $6 5 million at the end of the second quarter of 2022.
As Carl mentioned earlier, we did experience some order slippage into the third quarter and if not for that backlog figures would have been higher at the end of the second quarter.
Moving our discussions of the company's balance sheet, we exited the second quarter with $1.8 million in cash and that compares to $1 3 million at the end of the first quarter of 2023.
Cash levels do not include restricted cash of $1 6 million, which is a secure for letters of credit with various customers totaling $1 2 million.
400000 to secure corporate.
Credit programs.
Towards the close of the second quarter.
We closed on our follow on financing with Lind partners, which included $1 4 million in upfront proceeds as part of this financing we continued to make payments on our original convertible debt secured with linde.
February of 2022, well received an extension of repayment for another five months to have it.
Payment completed by July of 2024. This enabled the company to lower our monthly repayment by approximately 133000.
To review on a monthly basis, the determination of whether to repay in cash stock or a combination of both.
While we're working in a challenging environment.
Continue to examine every expenditure and will reduce costs, where we can to limit cash burn we were.
We're optimistic that the company can book additional orders in the coming months and with the improved utilization, resulting in increased revenue, which positions us for improved cash flow.
I'll now turn the conversation back to Kyle.
Thank you Amit.
To summarize.
The second quarter had several key positives, including improved revenues from Rep utilization, which was solid operational improvement.
We have more work to do including additional cost containment and improved selling especially within workforce solutions.
So we're cautiously optimistic about the remainder of the year, we are appropriately positioning the company to be prepared for future growth and show improved results, where we cap. We continue to work with our customers who are still tentatively on spending who's still tentative on spending.
In the current challenges of high inflation and economic uncertainty.
That said, we are performing and executing what is in our control such as executing on projects being in front of the customers to build our opportunity pipeline and being ready positioned for one orders R&D aborted.
While we were doing what we can during this continued ball in industry spend we feel confident in the longer term two to three key catalysts for the nuclear industry the need for a stable grid the drive towards energy security and independence and the de carbonization of the power sector.
These catalysts lead us to believe that the nuclear industry is entering a long lasting upward super cycle, even at the beginnings of that super cycle or 10 minute.
Given <unk> unique positioning as a heavily tech enabled provider of essential services to the nuclear power industry. We remain confident in our ability to create substantial long term value with that said Adam. Please proceed with the Q&A session.
We will now begin the question and answer session to ask a question you May Press Star then one on your touch telephone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
Again, if you have a question Thats Star then one.
There are no questions in the queue, Adam I'll turn it over to you for any online questions you might have.
Yeah.
Thanks, Jason.
They've kind of limit.
The performance Engineering Division is obviously performing carrying to lead what what's working there and why is workforce solutions still lagging other more improvements needed on the workforce solutions side.
Yeah, I'll take that I guess.
Look the engineering teams are doing a great job executing on projects at a higher utilization than we are.
Scene, and we really brought a lot of scrutiny that the hit.
So the efforts made sure we were focusing on high margin business there.
The business that we won in Q1.
Which was substantial and some of them some of it is already starting to flow through our our teams and they're working on those projects.
We still have backlog of course, depending on which line of engineering business. We're in but that's really encouraging to see that the compliment the team for really stepping up their performance.
Being self scrutinizing around utilization rates being disciplined.
And we need to keep that focus up.
For workforce solutions, where there are big projects, but we're positioned to win them as we demonstrated with that large digital.
Control upgrade and the over 5000 procedures, where we're upgrading and updating for the customer.
But the business is still in a lull and so we're keeping focus on that understanding what we can do to be as lean as possible, while being already position with clients for projects as they come. So you know that's the nature of the the two lines of business.
Obviously, there were some costs removed during the quarter, but are there more to be expected and can you quantify them.
Oh I'll take that question Adam Yeah look we.
We've been working on cost containment measures Wow. They started reaping some of the benefits where there is vendor renegotiation Asian leases that were expiring we have been flagging all along that around this time, we thought well some of those leases just ended in may So we didn't really reap the full benefit in the quarter, but a benefit nonetheless.
There are some one offs in there so both some one off reductions in some additional costs. So theres some noise, but on a go forward a lot of the labor.
Changes that we did were really done at the very end of the second quarter. So I expect that will reap more benefits going forward with the labor reductions that occurred at the end of the second quarter. So I think you'll see some stabilization I think we should be pretty reasonably where we're at maybe slightly better.
Going forward the rest of the way, while maintaining those cost as we increase the business revenue business.
This concludes our question and answer session I would like to turn the conference back over to Kyle Loudermilk for any closing remarks.
Alright. Thank you first of all I'd like to thank everyone for joining US. We appreciate your time and interest in GSE do you have any questions. Please reach out to automotive Steiner or from Lytham partners, and we will be happy to schedule a follow up call and again. Thank you everyone and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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