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Edited Transcript of GVP.OQ earnings conference call or presentation 16-Nov-20 9:30pm GMT

·20 min read

Q3 2020 GSE Systems Inc Earnings Call SYKESVILLE Nov 17, 2020 (Thomson StreetEvents) -- Edited Transcript of GSE Systems Inc earnings conference call or presentation Monday, November 16, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Emmett Anthony Pepe GSE Systems, Inc. - CFO & Treasurer * Kyle J. Loudermilk GSE Systems, Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Timothy Darin Chatard Meros Investment Management, LP - Portfolio Manager * Kalle J. Ahl The Equity Group, Inc. - VP ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Hello, and welcome to the GSE Solutions Third Quarter 2020 Financial Results Conference Call. (Operator Instructions). As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kalle Ahl with The Equity Group. Please go ahead. -------------------------------------------------------------------------------- Kalle J. Ahl, The Equity Group, Inc. - VP [2] -------------------------------------------------------------------------------- Thank you, Kevin, and good afternoon, everyone. Thank you for joining us today. 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 meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E 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 otherwise. 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 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 their most directly comparable GAAP measures in accordance with SEC Regulation G can be found in the company's earnings release. I'd now like to turn the call over to Mr. Kyle Loudermilk, Chief Executive Officer of GSE Solutions. Kyle, please go ahead. -------------------------------------------------------------------------------- Kyle J. Loudermilk, GSE Systems, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Kalle. I'd like to welcome everyone to GSE's Third Quarter 2020 Financial Results Conference Call. Joining me on today's call is Emmett Pepe, our Chief Financial Officer. Earlier today, we issued a press release covering our third quarter 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.gses.com, under the News section. In the third quarter, our industry faced -- continued to face curtailed bidding activity, delayed contract awards and project pauses due to the COVID-19 pandemic. We recorded third quarter revenue of $12.9 million and adjusted EBITDA of negative $600,000, both of which were below our respective prior year comparable figures and well below the normalized potential of our business. In this challenging environment, we remain sharply focused on cost containment and debt repayment, while staying in front of our customers through a hybrid virtual and in-person selling approach, positioning us for success when industry activities rebounds. After repaying nearly $10 million of long-term debt during the quarter, our cash and equivalents totaled $7.7 million at September 30, providing us sufficient financial flexibility to manage the business. Moreover, our business has the capacity to generate strong cash flow, and even during this unprecedented first 9 months of 2020, we generated positive cash flow with our cash provided by operations totaling $1.6 million. While we can't predict with precision or certainty, the near-term impact of the pandemic, our long-term outlook is positive. We provide essential high-value services to the nuclear power industry, which plays a critical role in the global decarbonization of energy. In the United States, we anticipate an upturn in nuclear energy under the Biden administration, which is determined to combat climate change that includes leveraging the carbon pollution-free energy provided by existing sources like nuclear. Part of Biden's ambitious $2 trillion climate plan unveiled in July calls for accelerated development of the dense small modular reactors, which are less expensive to build, safer and more efficient than traditional reactors. As some of you know, we are supporting our client NuScale, a leader in SMR technology with simulation technology and engineering services solutions. While both of our segments have been impacted by project delays due to the pandemic, Nuclear Industry Training and Consulting has been hit harder as clients spared the hours of their own workforces and reduced staff augmentation engagements to encourage social distancing. NITC also continued to be impacted by a significant project stoppage during the period at a client facility due to COVID-19. Our expectation is that this project will resume in 2021 as this work is essential. Significant staff augmentation bidding opportunities within the nuclear sector remain, but buying decisions, where possible, have been pushed out likely into 2021 due to client caution resulting from the pandemic. In this environment, we are fortunate to have a scalable model in which our NITC employees are only on our [pre-role] if they are billable. We also have been nimble, providing an increasing level of staffing solutions to other industries, such as the broader manufacturing sector, where we recently won several new contracts. Additionally, we are engaging with new clients serving other industrial verticals, including, but not limited to, alternative energy, transportation, engineering, land development and information technology. The team also continues to focus on expansion opportunities in our core energy sectors with our existing customer base as well as pursuing opportunities within the energy support industry, such as plant maintenance and manufacturing. Given the robust long-term demand outlook for stopping and training services to meet the unique needs of the nuclear industry, we continue to make targeted investments in the business to improve our outlook. On this note, in September, we were thrilled to announce the appointment of Brian Greene as Vice President of our Nuclear Industry Training and Consulting business. Brian brings us more than 15 years of staffing industry experience, including over a decade at System One in the professional staffing space, where he developed expertise in the nuclear energy and engineering sectors. Brian's passion already has reenergized the NITC Group during these challenging times, and we expect many good things to come under his team-oriented leadership style. This quarter, we also streamlined the organizational structure of our Performance Improvement segment, placing DP Engineering, True North and GSE's core engineering simulation business, all under Don Horn's capable leadership. Don has a remarkable long-term track record, delivering value for power clients, and we believe this organizational change will not only deliver cost savings, but also further our goal of creating a one-stop shop for cross-selling and upselling a unified suite of engineering solutions to industry. In the third quarter, Performance Improvement orders totaled $9.3 million, up sequentially from $7.1 million in the second quarter and compared to $10.7 million in the prior year quarter. Performance orders totaled $21.8 million for the 9 months to date, up from $19 million in the same period a year earlier. This is good news and speaks to the essential nature of the solutions we provide. We want a steady flow of fundamental meat and potato business as we continue to provide essential services to a critical industry in a period of time that is between large full-scope simulator projects. I'd also like to call out that Performance Improvement software revenue, which is SaaS-based and recurring in nature, reached $942,000 this quarter, up approximately 20% from the prior year period. We believe that the pandemic may be creating additional opportunities for our EnVision cloud-based software, which provides our clients with anytime, anywhere, simulation training and other tutorials. Requiring only Internet connectivity and a web browser, clients can leverage this technology in a safe and effective manner for essential training and workforce development. Our total backlog at the end of Q3 stood at $44.6 million, consisting of $33.2 million of Performance Improvement backlog, and $11.2 million of NITC backlog. Our backlog remained relatively flat compared to the end of the second quarter of 2020. Amid the pandemic, we feel this is a solid performance, yet we are working diligently to add to these levels as we approach 2021. We remain confident about GSE's long-term opportunity given our difficult-to-replicate assets, specialized employees and innovative technologies. GSE delivers essential services that are critical to our clients' operational safety and efficiency. As we have seen before in times of crisis, certain work can only be delayed for so long and for a limited period of time. Moreover, we believe nuclear energy will play a substantial role in our carbon-free future. In closing, and most importantly, our emphasis today continues to be on protecting the health and safety of our employees and clients during the COVID-19 pandemic. We've migrated a meaningful portion of our employee base to a remote work setting using collaboration technologies, tools and best practices. As a result, this has created an opportunity to further optimize our future real estate footprint, which we are aggressively pursuing. Our new work environment has fundamentally improved our project delivery approach to customers. We now deliver simulation projects with customers using integrated virtual project teams, resulting in higher quality deliverables, lower schedule risk and fewer visits to customer sites. This is a win-win. Regardless of the path COVID-19 ultimately takes, our long-term strategy remains intact. We continue to focus on organic growth, streamline our operations, contain costs, maximize cash flow and further strengthen our balance sheet. I'll now turn over the call to Emmett Pepe, our CFO, who will review the third quarter financial results. Emmett, please go ahead. -------------------------------------------------------------------------------- Emmett Anthony Pepe, GSE Systems, Inc. - CFO & Treasurer [4] -------------------------------------------------------------------------------- Thank you, Kyle. Total revenue in Q3 2020 was $12.9 million compared to $20 million in Q3 2019, reflecting a $4.2 million decrease in our Performance Improvement segment revenue and a $2.9 million decrease in our NITC segment revenue. The decrease in Performance Improvement revenue was driven primarily by COVID-19-related headwinds and our inability to commence certain projects remotely. The decline in NITC revenue was primarily due to COVID-19-related project delays and stoppages and lower staff augmentation needs from customers during the quarter. Gross profit in Q3 2020 totaled $3.3 million compared to $4.7 million in Q3 2019. Performance Improvement gross profit declined by approximately $1.1 million to $2.5 million. NITC gross profit decreased by approximately $288,000 year-over-year to $837,000. The decreases in gross profit for each segment were in line with our revenue declines. We continue to manage our cost structure during the pandemic to maintain our margin percentages. In fact, our gross profit margin percentages are up in both segments quarter-over-quarter and year-to-date to year-to-date. SG&A expenses totaled $2.9 million in Q3 2020 versus the comparable figure of $3.5 million in Q3 2019. The decrease in SG&A expenses were driven by a $952,000 cash settlement received from an escrow account for our purchase agreement with Absolute Consulting. Excluding this provision, SG&A expenses remained relatively stable on a year-over-year basis, reflecting our emphasis on cost containment. Operating loss equaled approximately $371,000 in Q3 2020, compared to an operating loss of approximately $365,000 in Q3 2019. The Non-GAAP adjusted EBITDA loss as defined in our earnings release, totaled approximately negative $600,000 in Q3 2020 compared to a positive adjusted EBITDA of $1.4 million in Q3 2019. During the first 9 months of 2020, we paid down $18.5 million of our long-term debt. In August, we successfully amended our credit agreement with Citizens Bank, and during Q3 2020, paid off the term loan used for the acquisitions of DP Engineering and True North Consulting. After the payoff of this term note, we believe we have sufficient cash and working capital available to support our ongoing business. We have been prudently managing our balance sheet. At quarter end, our net debt totaled $5.9 million, consisting of $13.6 million of debt and $7.7 million of cash. Total debt includes approximately $10 million that we received earlier this year under the payroll protection program -- loan program. We have used these funds for payroll and related costs such as rent, utilities and other permitted uses. As of September 30, 2020, we were in full compliance with all requirements in order to apply for forgiveness under the PPP loan. Exclusive of the $10 million PPP loan, which we expect to be forgiven, our net cash balance would be $4.2 million. This is a testament to our ability to manage through a difficult economic environment, generating positive cash flow as we go. I'll now turn the conversation back to Kyle. -------------------------------------------------------------------------------- Kyle J. Loudermilk, GSE Systems, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Emmett. Operator, please open the floor for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question today is coming from Tim Chatard from Meros Investment. -------------------------------------------------------------------------------- Timothy Darin Chatard, Meros Investment Management, LP - Portfolio Manager [2] -------------------------------------------------------------------------------- Great. Just related to gross margin, both segments up year-on-year and through the course of the year, actually, both segments trending quite strong relative to the lower revenue. If you had a recovery in revenue in future quarters, would you expect gross margin to revert back for any reason? Or are the current levels indicative of where you can keep gross margin, or potentially any other color there? -------------------------------------------------------------------------------- Kyle J. Loudermilk, GSE Systems, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. This is Kyle. I'll take that, Tim. And then, Emmett, if you have further color or thoughts, feel free to add on. Tim, it's a good question, and it really does in the time of the pandemic, while it's been challenging to shed some business and see some business delayed, it does shine light on the fact that in our core businesses, gross margins can be quite good, and that's what we're seeing right now, and that's helping us ride out this pandemic. It does show the ability that, when business does come flying back to help us focus on operating lean and mean and keeping that cadence to keep those gross margins as high as possible. With that said, some of these projects that have been delayed have been lower margin than what you're seeing in our core businesses right now. But there may be an opportunity to increase the margins based on the learning we've had during this pandemic that we alluded to in the call. Emmett, do you have any further color? -------------------------------------------------------------------------------- Emmett Anthony Pepe, GSE Systems, Inc. - CFO & Treasurer [4] -------------------------------------------------------------------------------- Yes, the only thing I was going to add, you kind of touched upon at the end there. The mix is always going to come into play. The NITC business is lower margin than the Performance segment. So depending on the revenue that's generated by segment, that will impact margin and the different customers and projects. But to Kyle's point, we believe we have strong margins overall with this business, and that's maintaining or maintaining that as we go through the pandemic. -------------------------------------------------------------------------------- Timothy Darin Chatard, Meros Investment Management, LP - Portfolio Manager [5] -------------------------------------------------------------------------------- Okay. You also mentioned, I think, specifically related to the NITC segment, industries outside of nuclear that you were pursuing. If I understood that correctly, I didn't catch the industries that you were potentially focused on, but maybe you could -- I think I cut alternative energy, but there were some others that were listed there. Is that a -- maybe you can flesh that out a little bit and give me some color as to what -- where you might be able to take that business outside of nuclear? -------------------------------------------------------------------------------- Kyle J. Loudermilk, GSE Systems, Inc. - President, CEO & Director [6] -------------------------------------------------------------------------------- Yes. Well, the ability to provide staffing services is really an opportunity cross vertical. And so what we've seen with the addition of Brian coming in, and with some of these other investments and sales folks is that we have been able to crack open into some other verticals in the broader manufacturing. One in particular was automotive. Strong -- very strong need for engineering talent in the automotive sector, with one of the folks that we added over the course of last year. We've seen a nice add in some services there. As we've alluded in the past, we have seen a temporal add for the medical industry in California, as they were working through the pandemic as a transition to a more permanent setup for that instance. But we're really focused on the energy sector, particularly nuclear, but we define where we can be profitable, we do find opportunities in broader manufacturing, which has really helped us weather this storm. -------------------------------------------------------------------------------- Timothy Darin Chatard, Meros Investment Management, LP - Portfolio Manager [7] -------------------------------------------------------------------------------- Okay. So that sounds like it's more opportunistic as opposed to a bona fide strategic vector to try to penetrate new industries. Is that the right way to think about it? -------------------------------------------------------------------------------- Kyle J. Loudermilk, GSE Systems, Inc. - President, CEO & Director [8] -------------------------------------------------------------------------------- No, not really. We hired these folks that I alluded to, and you can see in the past earnings conference calls, where we really intentionally hired folks beyond nuclear to target particular segments. Not -- where we've seen success are in the segments I've mentioned. So it's a result of strategic investment where we've been successful. We've continued with that investment, and that's where you see the results that we've discussed. If we're not successful, then we cut our losses and make sure that we are ready to bounce if the market turns. -------------------------------------------------------------------------------- Timothy Darin Chatard, Meros Investment Management, LP - Portfolio Manager [9] -------------------------------------------------------------------------------- Okay. And I've got a couple more questions, but I don't want to dominate the discussion if there's -- if it's better for me to go back in the queue, but what's your guidance there? -------------------------------------------------------------------------------- Kyle J. Loudermilk, GSE Systems, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- Yes, Tim, I would say just maybe ask 1 or 2 more questions, and then we'll check on the queue. -------------------------------------------------------------------------------- Timothy Darin Chatard, Meros Investment Management, LP - Portfolio Manager [11] -------------------------------------------------------------------------------- Yes. You mentioned the concept of simulation work maybe being delivered virtually. I just -- I'm curious about that if that's something that was sort of a COVID phenomenon or whether that's been something you've been working on for longer periods of time. And what potentially that might do to enhance your business going forward if delivering a virtual simulation is it -- would the revenue scope remain the same? Would the margin structure change at all? And I'm just curious to hear more about that. -------------------------------------------------------------------------------- Kyle J. Loudermilk, GSE Systems, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- Yes, I'll walk you through an example use case with a particular customer that's working with us to deliver simulation solution and training solution for their particular utility plant. Traditionally, utility sector is very traditional and doesn't adopt quickly to change for good reason, really for risk management. You're dealing with power plants. As long as they work and operate safely, not necessarily motivated to change, and that's pervasive in how projects are approached. What we've seen during the pandemic, while we put the investment and infrastructure in place to deliver on this technology and work virtually with customers, this infrastructure has been in place really for some time now because we've made the prudent investments to try to lower the amount of T&E in our projects to reduce margins and be more efficient and more accurate customers. So adoption of that on the customer side hasn't been as rapid as we wanted. But they were moving along, which was a good sign. So what we've seen with the pandemic is there is no travel unless it's absolutely essential, and we do have the need to go to client sites and sometimes clients come to us. But with the pandemic that really was an opportunity, a silver lining was to really leverage this technology, educate customers that, no, we don't need to travel to you as often. You don't need to travel to us as often. We can work virtually as teams using collaborative technologies such as Zoom, such as using -- being able to drop files directly on to client servers and vice versa in a secured manner with firewalls and DPMs and be able to work collaboratively for a broader scope virtually than we had been in the past that's made us more efficient, more accurate. Lessens wear and tear with travel, because we're saving the money on T&E. That can reduce margins marginally. But we don't see a reduction in the overall budgets for these projects. The work has to get done. We're just doing it more efficiently now. And that also explains somewhat of the margin gains you've been seeing. Kevin are there any more questions in the queue? -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Not at this time, sir, I'll turn the floor back over to you for any further or closing comments. -------------------------------------------------------------------------------- Kyle J. Loudermilk, GSE Systems, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- Great. Thanks, Kevin. Well, look, I'd like to thank everyone for joining us. It was a good discussion. We appreciate your time and interest in GSE. But we won't be on the road for investor conferences in the near term, given the pandemic. We remain accessible for one-on-one calls. We've had a number of good calls over these past few months, and we certainly look forward to more. So I wanted to emphasize that. Please reach out to our IR firm, Kalle Ahl and The Equity Group. If you're interested in scheduling a follow-up call, we'll be delighted to speak with you. Once again, I'd like to thank everybody for joining today's call with us. Thank you. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- That does conclude today's teleconference. Please disconnect your line at this time, and have a wonderful day. We thank you for your participation today.