Q4 2023 GSE Systems Inc Earnings Call
Good day and welcome to the G. S E systems, Inc, fourth quarter and fiscal year 2023 financial results conference call.
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I would now like to turn the conference over to Adam low and Steiner Vice President of Lytham Partners. Please go ahead.
Adam Lowenstein: Thank you Betsy and good afternoon, everyone and thank you all for joining us today to review the financial results for GSE Systems' fourth quarter and fiscal year 2023 ended December 31, 2023 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 GSE sister.
Adam Lowenstein: 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 of the Securities Act of 1933 as amended and section 21 E of the Securities Act of 1934 piece.
Adam Lowenstein: 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.
Adam Lowenstein: 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.
Adam Lowenstein: 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 yourself of new information future events or otherwise.
Adam Lowenstein: 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.
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 prepared in accordance with GAAP.
Adam Lowenstein: A reconciliation of non-GAAP measures to the most directly comparable GAAP measures in accordance with SEC 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 Chief Executive Officer of GSE solutions. Kyle. Please proceed.
Kyle J. Loudermilk: Thank you Adam I would like to welcome everyone to GSE is fourth quarter and fiscal year 2023 financial results Conference call.
Kyle J. Loudermilk: Earlier today, we issued a press release detailing our financial results hopefully that 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'll start with a brief update on the industry and then offer highlights of our quarterly and annual results.
Kyle J. Loudermilk: It will review the financial results and we'll conclude with brief Q&A session.
None: First a brief update on the industry.
None: Nuclear industry continues to build momentum on a global basis.
None: Momentum stems from the fact that more countries continue to set and drive towards decarbonization goals and clearly recognize that nuclear has to be part of the equation in accomplishing these goals there.
None: There are also several macro trends and geopolitical.
None: Political issues that are certainly shifting in the energy towards the energy industry that favor nuclear.
None: This can especially be seen in the recent surge in the price of uranium which is used to fuel. Many nuclear reactor sites. In addition, the desire to have enough electricity to power the use of newer technologies such as the massive adoption of artificial intelligence and bitcoin mining is driving the demand for a revival in nuclear which will provide sustainable.
None: Annabelle carbon free power that is available 24 hours a day seven days a week.
None: In order to power the massive data centers planned as AI and bitcoin and associated cloud computing scale nuclear power becomes the only scalable and stable carbon free power source option that can be reliably be available 24, seven a real time demonstration of this nascent trend is the recent acquisition by Amazon Web.
None: Offices of the 960 megawatt data center from talent energy and Pennsylvania, Amazon purchase the center for $650 million, primarily given its power source the Susquehanna steam electric station, which is the sixth largest nuclear power plant in the U S. The site produces 64 million kilowatt hours per day.
And it has been online since 1983 currently it is licensed to operate through 2042 and 2044, securing this data center, which is funded entirely from the nuclear power plant enables Amazon to take a significant step towards achieving its stated goal of becoming a net zero carbon company by 'twenty 40, 10 years ahead of them.
None: Net carbon net zero goals in the Paris agreement.
Hubertus of electric vehicles.
None: Also placed a significant demand on the grid for nuclear power to power a carbon free grid.
None: Offset the rise in the demand for electricity. These technologies offer and make sure that the power sources are secure and carbon neutral nuclear is going to be needed.
None: Even in recent weeks the headlines continue to be very favorable for nuclear globally. This includes the government in Japan filing requests for KEPCO to restart its largest nuclear power plant the Concho Osaka, Karl Karl what which has seven reactors in total generation capacity of almost 8000 megawatts.
None: This is on the heels of Japan's nuclear regulatory regulation authority granting permission for a restart of the site back in December. This is very positive news and demonstrates the Japan is serious about restarting its nuclear capabilities going forward. In addition to Japan and other recent news, Canada announced that its government is working on ways to fast track.
Approvals for nuclear energy projects. The Canadian government also recognizes that nuclear is going to be necessary base load power to get them to zero carbon the country is looking to achieve net zero emissions for its electrical grid by 2035 and be fully net zero by 2050.
As a result, the government announced that it is working on making approval process is quicker for nuclear power projects in order to bring them to fruition as quickly as possible.
None: In the U S market constellation Energy recently announced that is issued the first corporate green bonds in the U S that can be used to finance nuclear energy projects. A green bond is a financial instrument that has issued specifically to finance projects that deliver positive environmental or climate impacts while simultaneously enabling investors.
None: To invest in investments that promote sustainability and solve other environmental issues under.
None: Under this green bond issue the company raised $900 million and we used the proceeds for investing in maintenance expansion and life extensions extensions of its nuclear fleet.
None: While the tailwind for nuclear industry are apparent in our bound the capital spend within our industry is still moving at a slower pace. Although there are some signs of green shoots with funding from recent legislation starting to make its way into the system.
None: That said the near term outlook is certainly positive, but not yet back to the spending levels of pre Covid days. While this does put some strain on managing our business, we've been able to land key wins.
None: Having aligned our business to where the industry is spending money today, we will have and we have seen significant improvements in our operations in the latter half of 2023, we expect to have a full year benefit of this effort in 2024 as a result, which is very encouraging.
None: One area that has been very fruitful for the company is to help our customers improve their plant efficiency, which can be accomplished and some specific ways. One is for a plant to convert over to digital control system.
None: The plant can operate more efficiently safely and reliably.
None: The investment also help set the stage to extend the lifetime of the plants and prepare for future power uprights themes.
None: This is the means by which the existing infrastructure can be upgraded to produce more power.
None: As mentioned producing more power through up rates is an extraordinarily cost effective means to produce more carbon free nuclear power versus building new nuclear power plants. This is a critical critical area of focus for the nuclear power industry and GSE is well positioned to capitalize on these maintenance and upgrade opportunities as we are today.
None: Going forward a major part of our focus will be on the existing fleet of nuclear sites and assisting the operators with making sure. They can operate in the most efficient and safe manner.
None: Now for some perspective on Gse's business in Q4 and fiscal year 2023.
None: Overall 2023 was a year of transition we were successful in reworking the company's cost structure to get it into a position where we aren't consuming cash. This was not an easy task, but it is now paying off as seen in the company's financial performance in the second half of 2023, the fourth quarter was a bit lighter than expected on the order side.
None: But we have seen orders that slipped out of Q4 closed in Q1. This is good news and we look forward to renewed orders details in our Q1 earnings call.
That said, we are we're able to continue to operate at a high level and limit cash burn during the quarter.
None: We are also focused on growing the business and the profitable areas to which we are aligned especially on the engineering business as any additional business will now flow to the bottom line given the new operating structure.
None: As expressed in the last conference call, we continue to cut costs out of the business and make key strides to lower expenses compared to a year ago as seen in the fourth quarter and fiscal year results and Mike will provide more details on our cost management initiatives in his remarks now.
Mike: Now looking at our two divisions the company's performance Engineering Division continued to demonstrate solid results during the fourth quarter and fiscal 2023, we had strong wins during the year and recorded new orders of $37 6 million in 2023, which is up over 70% from 20 $22 million in 2020.
Mike: Two.
Mike: Many of these orders came with strategic new logos, including the expansion of the engineering services to provide critical value added solutions to our uranium enrichment company and two nuclear operators to name just three of many key wins.
Mike: The performance Engineering Division is also where we have our software and support cells, which were $4 7 million during fiscal 2023, as we mentioned in the past the software side of the business has provided excellent margins and predictability and we are pleased with these results.
Mike: New orders for the for engineering during the fourth quarter were approximately 5 million compared to $4 6 million, one year ago, and compared to $13 million in the third quarter of 2023, we were disappointed by the level of orders won in the quarter, but pleased with the orders for engineering in the second half of the year of approximately $18 million.
Many of the orders demonstrates the nature of the current market, it's lumpy customer cautious customer spending in the industry. During this tentative drive to adopt digital technology extended plant lifetimes and produce more power through targeted capital investment. These elements comprise what we feel will be a multi decade positive super cycle that is.
Mike: Just now in the process of ramping up.
Mike: Given the nature of the industry is more meaningful to look at the metric of new orders on an annual basis and as I related earlier orders for engineering was up 71% in 2023, showing improved order flow for engineering services and technology license, which is a leading indicator that the industry is ramping back.
Mike: I feel this is important it does improvement clearly demonstrates gse's tenacity and developing and winning more business close interaction with customers I'm proud of the team effort here. We are clearly demonstrating the positive initial results of our alignment with the market.
Mike: Our workforce solutions business continues to experience challenges, although it had a slightly improved quarter during the fourth quarter. The segment had revenue of $3 1 million up sequentially from $2 9 million in the third quarter of 2023, but lower from the $3 3 million in the fourth quarter, one year ago. The division is still experiencing difficulties within the.
Mike: Street due to customers being selective with regards to onsite staff augmentation services as well as the competitive marketplace given the highly fragmented nature of staffing providers to industry. We are currently focused on providing targeted staffing solutions to nuclear industry that makes sense for us and our customers in this market environment.
Mike: So to summarize this 2023 unfolded, we successfully streamline the operations of the company and improved our engineering utilization the third and fourth quarters in the fiscal year 2023 results really demonstrated that success and we fully expect to reap a full year's benefit of these efforts in 2024. This is a great.
Mike: Position to be in as we had as we have begun 2024.
Our business pipeline continues to remain strong.
Mike: We were not in control of client decisions to move forward on projects. We are doing all we can to aggressively engage with customers and prospects and developed wins for the business through client engagement. We are making sure. We are the vendor of choice and educating them and the breadth of services and value. We can offer them by using GSE, the new logo logo wins in 2023.
Mike: These are early indicators of this traction.
Mike: While the industry spend is still at a very conservative level compared to pre pandemic norms things are improving at G. S. A N. That's clear Gse's total new order flow for fiscal 2023 was $47 3 million up 7 million $7 7 million or almost 20% from $39 5 million in fiscal 2022, Rob.
Mike: Domestic that this momentum can continue into 2023, and GSE is well positioned to capitalize on this momentum.
Mike: I am proud of our team's accomplishments and dry in driving improvements during Q4 and fiscal 2023 I'd like to thank all of our employees. During this period, who worked diligently to help turnaround GSE and get the company back to the point, where we are today.
Specifically I'd like to knowledge Robbie corner, our senior Vice President of professional services, who has been with GSE since 2016 and brings over 18 years of experience in state of the art delivery of engineering services and software technology solutions. Ravi has been instrumental in our simulation side of the business, which has been a critical contributor to GSE only guarded.
Mike: More critical moving forward.
None: I'd like to highlight efforts by Damian <unk>, our vice President GSE engineering programs that performance Damian spend with GSE since 2007 and brings over 20 years of utility experience, both domestically and abroad.
His deep experience with various roles within the nuclear and energy industries and specializes in regulatory codes in compliance and plant improvement processes. He's been instrumental in keeping GSE at the cutting edge of applied engineering thought leadership with the industry not as demonstrated by the key wins that he continues to drive for the business. Thanks to our team the company.
None: It's definitely in a better place both from a financial and operational standpoint, and we have been since the pandemic.
None: We have we have more to accomplish as possible for the company in a place to be in a position of profitability and be debt free in the near future and will speak to the details of this this is great progress sets the stage for EBITDA growth moving forward I will now turn the call over to Emmett Pepe G. O C CFO, who will review the fourth quarter and full.
Emmett Anthony Pepe: 2023 financial results Emmett. Please proceed.
Emmett Anthony Pepe: Thank you Kyle.
Emmett Anthony Pepe: 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.
Emmett Anthony Pepe: Revenue during the fourth quarter of 2023 was $10 2 million slightly lower from a year ago, and a sequential decrease of 12% compared to $11 6 million in the third quarter of 2023.
Emmett Anthony Pepe: Revenues experienced a slight decrease from the prior quarter. This is consistent with prior trends due to heavy holiday and PTO usage at the end of the year, which leads to lower billable hours.
Emmett Anthony Pepe: Engineering Services Division continues to show positive results overall, despite a slightly slower quarter in the fourth quarter with revenues of $7 1 million, which was slightly lower from a year ago period of $7 5 million and sequentially below revenues of $8 7 million for the third quarter of 2023.
Emmett Anthony Pepe: Orders for the engineering services divisions were $5 million higher than $4 6 million from a year ago are lower than the 13 million received in the third quarter of 2023.
Emmett Anthony Pepe: As Carl indicated the company experienced some slippage with a few orders from Q4 into Q1.
None: Well this does move some order flow to the right. The key is that the company is winning the business.
None: Look at that on an annual basis order flow for engineering improved nicely.
None: $37 6, million% to 71% increase from $22 million in 2022.
None: The increases are due to an improved sales focus and our investment in the business development team in the past year, which has opened doors to new customers. Our investments led to an increase in customer spending and its well positioned us for a solid 2024.
None: Workforce solutions Division revenue in the quarter was $3 1 million a slight sequential improvement from $2 9 million in the third quarter of 2023.
None: Slightly lower when compared to $3 3 million in the fourth quarter one year ago.
None: Orders were $2 3 million in the fourth quarter. This compares to $1 7 million in the third quarter of 2023.
None: Which was slightly improved on a sequential basis.
None: Looking at a year ago.
None: Orders for workforce solutions were $6 8 million.
None: The division continues to experience certain challenges, including early termination fee received from clients.
And as well as increased competition and less onsite work on projects. We are closely monitoring this business and starting to plan internally about making this unit more efficient and advantageous for the company in the longer term.
None: Given the challenges in this segment we.
We had a loss on impairment during the fourth quarter of 500000, which resulted in the elimination of the remaining goodwill related to workforce solutions on the balance sheet.
None: As Carl mentioned previously we have taken steps to align the segment with the current level of business and we continue to explore ways to maximize its value.
None: Gross profit in the fourth quarter was $2 6 million or 25, 5% of revenue.
Lower when compared to third quarter of 2023.
Which was $3 7 million or 32, 1% of revenue.
None: This compared to gross profit of $3 1 million or 28, 2% of revenue for the fourth quarter of 2022.
None: The gross profit the gross margin decline compared to the third quarter of 2023 in the fourth quarter of 2022 were due primarily to a lower percentage of engineering revenue caused.
None: Caused by a decrease in the billable hours due to the holiday and P. T U P T O us during the fourth quarter.
None: Engineering utilization has been a major focus in the second half of 2023.
None: We have seen the results reflect it.
None: Movement.
None: We increased our billable utilization Kevin.
3% in the second half of the year.
None: Which is driving the factor of five 6% margin percentage uptick in the engineering segment from the first half to the second half of 2023.
None: Operating expenses, excluding depreciation and amortization in the fourth quarter were $3 4 million a sequential decrease of 22% when compared to the third quarter of 2023, which were $4 4 million.
None: It's also compared to $3 9 million in the fourth quarter of 2022.
Operating expenses in the quarter were lower due to cost containment and certain costs that are not incurred in the second half of the year, such as audit fees and certain public company costs.
None: We are confident in expense reduction measures that were conducted in the past year.
None: The opex per quarter should remain at similar levels in the future quarters in the range of three and a half to $4 million per quarter.
None: Net loss in the fourth quarter was $2 3 million or a loss of <unk> 82 per share, which was slightly lower when compared to the third quarter of 2023, which was a loss of $2 million.
None: Or at 82 cents per share compared to loss of 1.59 in the fourth quarter of 'twenty, two or a loss of 68 cents per share.
None: Adjusted net loss was 765000 or 28.
None: <unk> per share compared to an adjusted net income of 175000 or seven cents per share in the third quarter of 2023.
None: And compared to an adjusted net loss of $1 1 million and 49 cents per share in the fourth quarter of 2022.
None: Adjusted EBITDA totaled a negative 98000.
None: During the fourth quarter compared to a positive 659000 in the third quarter of 2023 and compared to a negative 407000 in the fourth quarter from one year ago.
None: Company's backlog ended at 34, and a half million dollars at the end of the fourth quarter and fiscal year.
None: Slightly lower than the prior quarter of $37 6 million as the company experience. Some order slippage into the first quarter of 2024. For example received 900000 funding in Q1, which was expected in the fourth quarter of 2023 is part of a major engineering projects expected to total roughly $4 3 billion over four years.
None: <unk>.
None: The majority of the backlog continues to lie within the engineering performance Division.
None: Performance Engineering segment backlog was approximately $29 million at the end of the fourth quarter.
None: Lower from the $31 4 million at the end.
None: Third quarter of 2023.
None: But improved when compared to the $23 8 million the same period a year ago.
Workforce solutions Division was $5 5 million at the end of fourth quarter of 2023, which was slightly lower than the $6 2 billion at the end of the.
None: Third quarter 2023.
None: This compared to $9 1 million at the end of the fourth quarter of 2022.
What would our discussions of the company's balance sheet, we exited the fourth quarter with $2 3 million in cash the.
None: The cash levels do not include the restricted cash of $1 5 million, which is secure for letters of credit.
None: With various customers totaling $1 1 million and 400000 to secure corporate credit card program.
None: We continue to make payments on our convertible debt secured liquid will become clothing or repayments on the first tranche. This may may of 'twenty four and as of today, we have paid $6 million with just 200000 remaining on our convertible notes.
None: This demonstrates great progress in the potential of the company.
None: Moving forward.
None: In June of this year, when we begin to replay the second tranche of $1 8 billion from land and anticipate full payment by May of 2025.
None: To review.
None: On a monthly basis.
None: The determination of whether to repay in cash stock or a combination of both.
None: And we will prioritize paying in cash whenever possible.
None: While we are still working in a challenging environment. We continue to examine every expenditure and reduce costs, where we can to preserve our cash position.
None: We have reduced our expenditures by roughly $1 million per quarter as compared to one year ago, but I'll reiterate that while there are always some quarterly shifts of costs lowering our quarterly expenses to around three and a half to $4 million. We remain optimistic that the company can't book additional orders in the coming quarters, which along with our improved utilization.
None: Salt and improved cash flow.
None: While there's more work to be done the company has made significant strides to becoming a leaner operation and is positioned to further improve cash flow and financial results.
I'll now turn the conversation back to Kyle.
Kyle J. Loudermilk: Thanks, very much Amit.
Kyle J. Loudermilk: Summarized 2023, and it's been a year of improvement for GSE, especially in the second half as it demonstrates the company has been streamlined and aligned to focus on higher margin businesses and deliver revenue in a more efficient manner.
We expect to reap the benefits of these second half improvements for the full year of 2024, its a great position to be and we're highly focused on winning more business, where we can and remain optimistic about the future market environment is still somewhat conservative, but we do believe.
Kyle J. Loudermilk: That there are strong tail tailwind stuff for the nuclear industry will result in an improved environment for the long term.
Kyle J. Loudermilk: Adam could you. Please proceed with question and answer session.
None: It's called Betsy will you. Please proceed.
Adam: We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
None: If you are using a speakerphone please pick up your handset before pressing the keys.
None: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
None: At this time, we will pause momentarily to assemble our roster.
None: Yes.
Speaker Change: There are no questions from the phone line at this time I'd like to hand, the Q&A session back over to Adam Lone Star.
Speaker Change: Okay Betsy Thank God. Thank you I'll ask Kyle and then a few questions.
Kyle order flows a bit off in the fourth quarter, but it seems somewhat streaky can you add a little color to that and what does the pipeline look like.
Kyle J. Loudermilk: Yeah look I think as we stated in the call looking from quarter to quarter, it's always a bit of a soft to diagram like you build up and then there's a lag in your buildup.
Kyle J. Loudermilk: When you look year over year, our pipeline has grown significantly and you look at the second half of the year for orders for engineering.
Kyle J. Loudermilk: Very significantly over the over the prior period of time, So we expect that to continue and you.
Kyle J. Loudermilk: We've had some really nice orders that closed in Q1 for instance, so we're looking forward to highlighting the business.
Kyle J. Loudermilk: Q1 conference call and earnings call. So we remain really positive, especially around this engineering business, we're just starting to see traction and yes, we.
Kyle J. Loudermilk: We've demonstrated some significant growth in our winning business for the engineering side, we expect that to continue really focused on that so.
Kyle J. Loudermilk: So we do believe things have turned.
Kyle J. Loudermilk: And what's the feedback from the salespeople with regards to project low it seems although as you mentioned lumpy that the tempo of bidding has improved is that correct.
Yeah sure has you know, particularly on our design and then well really across the board on engineering design analysis programs and performance.
Kyle J. Loudermilk: Expecting.
Kyle J. Loudermilk: And seeing improved bids, which you know should yield an improved order flow likewise in simulation, particularly with our work for the deal.
Kyle J. Loudermilk: Excuse me D O labs, which is.
Kyle J. Loudermilk: An area of long term investment for the U S government Department of the Navy significant client of ours and that's growing so again, we look forward to talking to the details of that but that's what we're hearing from the sales force.
None: So you've done a great job at right sizing the company getting expenses down are there anymore cost cuts to be had.
None: Do you want to talk about I'll take I'll take that call Oh, Yeah look we're constantly looking to.
None: At our cost right, we're not going to sort of rest of what we've done we have got a couple of office leases, including the headquarters building that up.
None: This year. So I think we will look to do we are assessed.
None: First the size and other cost.
Cost savings on our office leases.
None: Vendor spend is always going to be on the table I think we will.
None: Went through it.
None: Did a good job last year, but I do think there are some.
None: Combing through with a fine tooth comb to just see if there's additional savings to be had on the cost side.
None: And then can you give us a little bit of an update or a reminder, with the debt is still owed what what's the timeline on it and you know as it.
None: Company, becoming debt free a possibility in the future.
None: Yeah as I mentioned on the call the.
None: We're coming up on.
None: On the completing the personnel that we that we oh.
None: Signed in February of 'twenty two.
None: Uh huh.
None: A couple of months that that will be.
None: I expect it to be paid off and then the <unk>.
None: No from a year ago, a $1.8 million will start paying in June and I think under normal payments within a year. They are 25, we should be.
Oh, that's great.
None: That's all the questions I have Carlos would you like to conclude.
Yeah, Thanks, Adam and I'd like to thank everybody, who joined US today for joining US. We appreciate your time and interest in GSE.
Carlos: We're excited about moving forward in the future here do you have any questions. Please reach out to Adam loan Steiner from Lytham partners and we'd be happy to schedule a follow up call with management again, everybody. Thank you so much and have a great day.
None: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
None: Thanks Betsy.
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