Q3 2023 GSE Systems Inc Earnings Call

Good day and welcome to the G. S. E Systems, Inc. Reports third quarter fiscal year 2023 financial results conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Adam low and Steiner Vice.

President at Lytham partners. Please go ahead.

Thank you, Dave and good afternoon, everyone and thank you all for joining us today to review the financial results for GSE systems third quarter fiscal 2023 ended September 32023 with us on the call representing the company today are Kyle Loudermilk, President and CEO of GSE systems, and Emmett Pepe, our chief financial Officer of.

S E systems before we begin I would like to remind everyone that statements made during the course of this call maybe considered forward looking statements within the meaning of section 27 out of the Securities Act of 1933 as amended and section 21 E 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 a statement is not forward. Looking these 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 GSE does not intend to update or revise any forward looking statements, whether as a result of new information future events or other.

Wise.

On this call management may refer to EBITDA adjusted EBITDA adjusted net income and adjusted EPS, which are not measures of financial 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 not be should be considered in addition to and not as a substitute for or.

Superior to any measure of performance prepared in accordance with GAAP.

A reconciliation of non-GAAP measures to the most directly comparable GAAP measures in accordance with the SEC regulation G can be found in the company's earnings release with that I'd like to now turn the call over to Mr. Kyle Loudermilk, President and Chief Executive Officer of GSE solutions. Kyle. Please proceed.

Thank you Adam I'd like to welcome everyone to GSE third 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 <unk> dot com under the news section.

Lay out the agenda for today's call I will start with a brief update on the industry and then highlight of our quarterly results and will then review the financial results and we'll conclude with a Q&A session first a brief update on the industry.

Nuclear industry continues to gain global momentum, especially as more countries recognize that to attain certainty carbonization levels nuclear has to be a part of the equation in accomplishing these goals.

That said there are many macro trends and geopolitical geopolitics that are causing certain shifts in the energy industry as well as other industries on that front due to the current inflationary environment and higher interest rates, we're seeing industry wide pressures, where our customers are reluctant to spend on projects that can be delayed.

That said customer spend is currently focused unnecessary projects to keep their existing facilities running efficiently and up to regulatory requirements.

As a result GSE has won many orders this year aligned to these priorities a little more on that later in my remarks.

We believe that given the nature of the economy 90 central projects within the power industry are being canceled or put on hold.

Many cleantech projects are not providing the same economics now that interest rates are at higher levels.

Not only are the financing costs higher but construction costs are much higher due to the inflation current inflationary environment and labor constrained environment, So where does that leave the industry, while interest rates fluctuate. They arent returning anytime soon to prior levels and as a result, we are witnessing a shift from new project mode to need to refurbish upgrade.

Two existing facilities.

Society has come to realize the importance of nuclear for achieving clean energy goals and energy security and as a result, the U S government supporting industry from the federal level through initiatives, including the inflation reduction Act and infrastructure bills. The existing fleet of facilities are being recognized for the value they provide and will be relied upon for many many years to come.

It is nearly impossible today to justify a newbuild given the economics complexities and extended timelines associated with such an endeavor. In contrast existing facilities can be upgraded and refurbished to produce more power over time and do so at reasonable incremental cost the United States leads the world and the ability to produce more power from existing assets over.

Time.

CSC is well positioned to benefit from this trend and we see that playing out we have issued a series of press releases over the past few months that highlight recent wins across our lines of business, including a significant win to assist a client to upgrade procedures for their plants as they transition to a digital control environment and other.

As well as announcing other engineering contracts aligned to the priorities outlined earlier.

During the third quarter, we announced the contract valued up to $15 million over several years to support a project to modernize the nuclear power plants main control room to a digital environment.

This contract. This was one of the largest nuclear operators in the United States and we are excited to play a critical role in this transformation, we expect client spending to ramp up on this project as they work through supply chain issues regarding your actual control systems in 2024, other plants have announced similar plans to convert to digital controls and while it is hard to deter.

German the timing of future projects, we are optimistic that there are more to be awarded in the coming years as the conversion to digital evolves to clear industry trends.

As plants convert digital control system operate more efficiently safely and reliably investment also help set the stage to extend the lifetime of the plants and prepare for future power uprate, the means by which this existing infrastructure can be upgraded to produce more power.

You mentioned producing more power through up rates is an extraordinarily cost effective means to produce more nuclear power versus building new plants. This is a critical area of focus for the nuclear power industry and GSE is well positioned to capitalize these maintenance and upgrade opportunities now.

Now for some perspective on Gse's business in Q3 of fiscal year 2023.

The company performed at a much improved level during the third quarter and the financial results new orders demonstrate that while the industry is still conservative with regards to capital spending investors should take note of not only the gse's improved order flow, but also the diverse types of projects. We've been awarded given the dampened spend from industry overall.

We're focused on winning business with higher margin and that shows in our results.

Other positive result in the quarter was the improved utilization of our billable engineers. This has enabled the company to improve financial efficiencies and drive the business back to adjusted EBITDA positive.

We believe we're on the right path in the third quarter results reflect that in addition, several orders that were awarded earlier. This year have commenced and that progress is now hitting our income statement. One project in particular that I'd like to highlight is the five year contract for the expansion of specialized support surfaces to U S government engineering laboratories dedicated.

To the support of the United States Navy. This contract has been a key win for GSE and are sure showed growth in the services. We've historically provided this customer given the nature of the services, we are able to obtain solid margins as well. This business has definitely become a cornerstone for GSE and we were delighted to serve the mission of Navy and the department of energy.

As expressed in the last conference call, we continue to wring costs out of the business and made key strides to lower expenses compared to the second quarter a year ago.

When adjusting for onetime costs of approximately $1 million during the quarter that are nonrecurring in nature. Our expenses are at a much improved level that's.

This helps to put the company on better footing going forward.

We'll provide more details on our cost management initiatives in his remarks.

The company's performance Engineering Division continued to demonstrate improvements with a nice stream of wins of new business, many of which we've announced during the quarter and recently wins of strategically logos expansion of engineering services to provide value added to uranium enrichment company two nuclear operators in Texas just to name a few.

The performance Engineering Division also is where we have our software and support sales, which were $1 4 million during the quarter and $3 7 million year to date up 3% from the same period a year ago as we mentioned in the past the software side of the business has provided excellent margins and now represents a growing annuity.

It's beginning to look much like a software business.

New orders for performance engineering during the third quarter were $13 million significantly higher from the second quarter, which were $4 9 million due to timing of some orders that closed in Q3, instead of Q2 with that said year over year increases in orders were better for their division, which were compared to $7 2 million.

We feel that this improved order flow for engineering services and technology licenses as a leading indicator of that industry is slowly ramping back the improvement I feel also demonstrates csc's tenacity and being able to develop and win more business through tighter interaction with customers and I'm proud of the team effort here and promising early results of our alignment with the market.

Our workforce solutions business continues to experience challenges segment had revenue of $2 9 million in the third quarter of 2023 sequentially lower from $3 3 million in the second quarter and compared to $3 eight one year ago.

We have retooled the division is expressed in prior conference calls the division continues to lag as customers are still being selective with regards to onsite staff augmentation services. We have align this business to critical new opportunities in nuclear such as the 15 million project win highlighted earlier.

Eager for clients spend on the project to ramp as their supply chain challenges get addressed.

We did have some solid order flow in the quarter, which were offset by early project termination by customers in the tune of $1 7 million, it's hard to predict or estimate any early project termination, but it is inherent part of this business as customers either complete projects or allocate funds to different projects that may be deemed as a higher priority.

While these challenges persist I am pleased that the division despite lower volumes reported a breakeven quarter on an adjusted EBITDA basis. This gives us some solace that the division has potential upside with customers start to ramp up spending on certain projects.

Summarized we have successfully right sized the company in order to improve our utilization on an ongoing basis I believe the third quarter really demonstrates that success. It was our first adjusted EBITDA positive quarter in two years and our strongest positive adjusted EBITDA quarter since 2020.

We continue to engage with as many customers and potential new customers as well, we are making sure that the vendor that we are the vendor of choice and educating them and the breadth of services, we can offer them by using GSE as a key provider.

Our recent contract wins announced over the prior weeks demonstrate meaningful progress in the dementia.

Our business pipeline continues to remain strong and while we're not in control of client decisions to move forward on projects. We are doing all we can to engage with customers and prospects and develop wins, while the industry spend is still at a very conservative level compared to pre pandemic norms things are improving at GSE for order flow on engineering side as a result of our efforts.

Our GSE new order flow for the first nine months. So far of 2023 is $39 million. This equals the order flow for the entire year 2022. We are optimistic this momentum will continue I'm proud of our teams that complements accomplishments of driving improvement in the third quarter I believe this demonstrates we're focused on turning this.

Company around while we wish that momentum was building faster, we do continue to make progress towards achieving our goals of increasing orders backlog and revenue growth. The new orders already received and announced in the third quarter are a step in that right direction I'll now turn the call over to Emmett Pepe GSE CFO, who will review the third quarter financial results and then please proceed.

Okay.

Thank you Tal with.

With 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 third quarter of 2023 was $11 6 million.

A year and year over year decrease of 3% compared to $11 9 million in the third quarter of 2022.

<unk> lower by 7% when compared to $12 4 million in the second quarter of 2023.

The engineering Division continued to perform well for the company with revenues of $8 7 million for the third quarter of 2023 <unk>.

This compared to $9 million in the second quarter of 2023, and compared to $8 1 million in the third quarter of 2022.

Orders for engineering performance were $13 million, which demonstrated.

Significant increases from the $4 9 million in Q2 of 2023, which is up from last year's $7 2 million in Q3 of 2022.

The increases are due to an improved order flow environment for engineering services as well as the timing of when the orders are received.

Workforce solutions Division revenue in the quarter was $2 9 million.

Turning to $3 3 million in the second quarter of 2023, and compared to $3 8 million in the third quarter of 2022.

Orders were $1 7 million in the third quarter of 2023, which was slightly improved on a sequential basis when compared to $1 3 million in the second quarter of 2023.

Looking year over year. The division continues to experience some challenges with revenues recorded a $3 8 million in the third quarter of 2022.

The decrease in orders in the third quarter stemmed from early terminations, we receive from our clients and the magnitude of $1 7 million.

Terminations can occur depending on the scope of service.

Eat of project completion and other variables.

The vision is still experienced somebody get listings from customers. We were closely monitoring this business and we are optimistic.

The book to business that was available to the marketplace.

Gross profit in the third quarter of 2023 was $3 7 million or 32, 1% of revenue.

This compared to gross profit of $3 2 million or 26% of revenue in the second quarter of 2023.

And $3 3 million or 27, 4% of revenue in the third quarter of 2022.

Gross margin improved over the second quarter of 2023 and third quarter of 2022.

Due primarily to a greater percentage of engineering revenue increased utilization and margin improvements are large engineering projects.

Margin of 32, 1% was the highest it's been since 2016.

At the beginning of Q3, we implemented a utilization initiative for the engineering segment that has reduced unproductive labor costs and improved margins.

Operating expenses, excluding depreciation and amortization in the third quarter of 2023 were $4 4 million compared to $3 8 million in the second quarter of 2023 and compared to $4 5 million.

In the third quarter of 2022.

Operating expenses in the quarter were affected by a couple of nonrecurring expenses, driven primarily by a $750000 settlement of a lawsuit stemming from technical dispute in our workforce solutions Division and the repayment of this settlement will be done quarterly during 2024.

These expenses were not incurred operating expenses would have been about $3 4 million, which is lower than opex costs of $3 8 million in Q2 of this year and the $4 4 million in Q3 of a year ago.

We are confident in the expense cutting that was conducted in the past few quarters and that the opex per quarter should remain at stimulus levels in future quarters.

The net loss in the third quarter of 2023 was 2 million or a loss of 82 per share compared to a loss of $1 5 million in the second quarter of 2023 or <unk> 62 per share.

The net loss.

Q3 of 2022 was $9 million.

<unk> 22 loss per basic and diluted share, which included a loss on impairment of $7 5 million.

Net loss in the third quarter of 2023 also included a loss on impairment of 900000 coming from the reevaluation of the company's workforce solutions business.

Due to the.

Market capitalization of the company and the slowdown in workforce solutions divisions, we performed an impairment analysis on both segments of which resulted in the lowering of the goodwill carrying value of the work Force solutions Division.

While the workforce solutions divisions, not shown the stability and growth.

We would have liked it is still a critical piece of our business and that's promising opportunities moving forward such as the $15 million project Karl mentioned expected to ramp up in 2024.

Adjusted net income was a positive 175000 or seven cents per share in the third quarter of 2023 compared to an adjusted net loss of $1 3 million or 53 per share in the second quarter of 2023.

And an adjusted net loss totaled $1 1 million or <unk> 49 per diluted share in Q3 of 'twenty two.

Adjusted EBITDA totaled positive 659000 for the third quarter of 2023.

And then improvement compared to the negative adjusted EBITDA of 361000.

Two of 23 and the negative adjusted EBITDA of 690000.

In the third quarter from a year ago.

The company's backlog improved during the third quarter to $38 million as order flow gained in the quarter, primarily within the engineering performance Division.

There was an improvement from 34 million at the end of Q Q2 of 'twenty, three and higher than the $32 million level a year ago.

Performance Engineering segment backlog was $31 4 million at the end of the.

Q3, 2023 compared to $26 9 million at the end of Q2 2023.

And also improved when compared to the $26 9 million at the same period a year ago.

Workforce solutions Division was $6 2 million at the end of the third quarter of 'twenty three.

The $7 5 million at the end of Q2 of this year and then that compares to $5 6 million at the end of Q3 a year ago.

We want our discussion to the company's balance sheet, we exited the third quarter with $2 million in cash, which compares to $1 8 million at the end of the second quarter of 2023 the.

The cash levels do not include restricted cash of $1 5 million, which is the secure for letters of credit with various customers totaling $1 1 million and 400000 to secure our corporate credit card program.

We continue to make payments on our convertible debt secured with Lynn and anticipate full full repayment by March of 2025, we continue to review on a monthly basis, the determination of whether to repay cash stock or a combination of both and given recent improvements in the business, we had been paying in cash in the past five months.

On October 30th.

We implemented the reverse stock split.

And have subsequently traded above the minimum stock price threshold for more than 10 consecutive days.

And as the company previously disclosed in its form 8-K filed on November 3rd the company expected to regain compliance with the NASDAQ listing standards on November 10th.

The company is now in compliance with all ethical NASDAQ listing standards and we received a confirmatory letter to that effect from NASDAQ. This afternoon.

While we are still working in a challenging environment. We continue to examine every expenditure and will reduce costs, where we can to preserve our cash position.

That said, we have reduced our expenditures by roughly $1 million per quarter as compared to one year ago, and I'll reiterate that while there's always some quarterly shifts of costs lowering our quarterly expenses to around $3 4 million. We are optimistic that the company can't book additional orders in the coming months, which will improve our utilization and result.

Improved cash flow.

I'll now turn the conversation back to Kyle.

Okay.

Thank you Amit to summarize the third quarter demonstrated improvements to the business as we removed additional cost we're able to drive better efficiency through our engineering Division, we're laser focused on winning more business, where we can and this has been have been seen in recent wins, we announced during the fourth quarter. We're cautiously optimistic about the remainder of the year and the longer term.

While we were doing what we can during this continued lull in industry spend we remain positive in the longer term that the nuclear industry is undergoing a longterm resurgence for the reasons. We outlined on this call. There are three key drivers such as the future.

For the future the nuclear industry, one the need for a stable grid to the drive towards energy security and independence, and three and not least the de carbonization of the power sector, given gse's unique positioning so heavily tech enabled provider of essential services to the nuclear power industry, we remain optimistic in our opportunity.

Great substantial long term value with that said Adam please.

Proceed.

A question and answer session.

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[noise] would manage.

David It's Adam.

Lytham partners I'll I'll ask a few questions in the meantime.

Kyle order flow improved nicely in the quarter can you discuss the quality of your orders and how your margins are improving as a result.

Yeah. Good question Adam Thank you.

Look the order flow has really improved on the engineering side.

Have a great team, leading the three lines of business simulation.

Have.

Our design and analysis group and we have our FERC programs and performance. So we've seen very solid quarter across the board, including winning new logos such as the uranium enrichment provider.

Which is a mission critical.

Program for the United States to produce its own hey, Lou and light enriched uranium.

And that's that's been a great relationship that keeps growing likewise, we recently announced these two wins in.

To be provide engineering services into two significant nuclear power operators in the state of Texas.

Again, we feel this is just the momentum is building.

So.

That order flow has been solid because it's on the engineering side that explains our improvement in gross margin.

Engineering margins much higher than the workforce solutions side of the house and so.

So we expect that trend to continue.

You've had a very good diversification of services provided on the engineering side of the business.

This shows some some great depth at GSE and as well as the industry. How many more types of these contracts exist could potentially every nuclear plant operator have a need for the various services wins that you've been awarded recently.

Yes.

Another good question Adam the fact of the matter is we are aligned to the key drivers as a company GSE as a purpose built company that is aligned to the critical drivers that are leading the nuclear plant operators to make investments and extending the lifetime of the plants.

And.

Therefore also applying for lifetime.

Excuse me operating license extension, so so and extending the lifetime of the plants are operating license extensions and investing in their plants to produce more power from those plants over time versus building new nuclear power plants.

Those are two things that were already aligned to this business. We really took advantage of what we could during COVID-19 to make sure we put in commercial infrastructure throughout.

New customers and existing customers and as they start to head down the path to spend on these two dimensions spend a lifetime of the plant produced more power ever.

Every plant should be taking about what GSE has to offer and we're you know we're still a small company.

Call it $50 million ish.

And.

But the amount of engineering services consumed by the U S nuclear fleet by Conservative estimates could be could be us.

As much as half a billion dollars a year and then some so we're we're a small player and what has a very large served available market and so there's a lot of upside ahead for us as we execute and deliver improve our quality and customer value.

Yes.

What's the feedback from salespeople with regards to the project flow it seems although a bit lumpy that the tempo bidding has improved is that correct.

You know I'd say, it's it's a it's a little.

Multi dimensional what we see is.

By and large and this as we've done our own channel checks with other vendors that serve the nuclear power industry as well as from customers and prospects that we deal with they are in a very conservative spend that they're only spending money, where they have to spend money either to keep up with regulatory compliance issues or to address these critical.

All projects around addressing lifetime extension <unk> preparing to invest more in the plants to produce more power.

Other than that it's it's really.

Noise. So what we see from the industry is conservative focused on two things very cautious about how they're moving forward and so the only way we can affect that is to be in front of these customers on a regular basis make sure. They are aware of our story and capabilities to make sure that what we're doing for them is delivered on time on budget.

And of high quality, but they are building their confidence as they get to know GSC and that improves our likelihood of giving us the next opportunity.

The company has done a great job in right sizing itself and getting expenses down are there any more cost cuts to be had.

Oh, Hey, Adam This is Matt I'll take that one.

I think it's important to note we positioned ourselves through the.

The actions we've taken.

As the company grows we will not need to add any significant costs right. So that's an important aspect that I believe will always look we changed the culture will continue to monitor our utilization and not let that slip and and vendor spend is always something we're going to look at as well.

Supplier agreements come off Friday renewals will look to take cost out of the business.

Ongoing basis for sure.

Thanks, gentlemen, that's that's all my questions.

Well look thanks, thanks for joining us everybody just to make some conclusions remarks here. We really appreciate your time and interest in GSE I think we're headed in the right direction and just this quarter can demonstrate where we're headed.

If you have any questions. Please reach out to Adam loan Steiner from Lytham partners and we'd be happy to schedule a follow up Paul we're always available. Thanks again, everyone and have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.