GSE Systems, Inc. (NASDAQ:GVP) Q3 2023 Earnings Call Transcript

GSE Systems, Inc. (NASDAQ:GVP) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good day, and welcome to the GSE Systems Inc. Reports Third Quarter Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Adam Lowensteiner, Vice President at Lytham Partners. Please go ahead.

Adam Lowensteiner: 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 30, 2023. With us on the call representing the company today are Kyle Loudermilk, President and CEO of GSE Systems; and Emmett Pepe, Chief Financial Officer of 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 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 or words that are used to identify forward-looking statements, but their absence does not mean a statement is not forward-looking.

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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’re 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 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.

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Q&A Session

Kyle Loudermilk: Thank you, Adam. I’d like to welcome everyone to GSE’s 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.gses.com under the News section. To lay out the agenda for today’s call, I will start with a brief update on the industry and then highlights of our quarterly results. Emmett will then review the financial results, and we’ll conclude with the Q&A session. First, a brief update on the industry. The nuclear industry continues to gain global momentum, especially as more countries recognize that to attain certain decarbonization levels, nuclear has to be a part of the equation in accomplishing these goals.

That said, there are many macro trends in 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 are seeing industry-wide pressures where our customers are reluctant to spend on projects that can be delayed. That said, customer spend is currently focused on necessary 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, nonessential projects within the power industry are being canceled or put on hold. Many clean tech 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 aren’t returning any time soon to prior levels, and as a result, we’re witnessing a shift from new project mode to need to refurbish upgrades to 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 is 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 time lines 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 costs. The United States leads the world in the ability to produce more power from existing assets over time. GSE 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 a 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 is 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 their actual control systems in 2024. Other plants have announced similar plants to convert to digital controls and while it is hard to determine the timing of future projects, we are optimistic that there are more to be awarded in the coming years as this conversion to digital evolves to a clear industry trend.

As plants convert to digital control systems, they’ll operate more efficiently, safely and reliably. The investment also helps sets the stage to extend the lifetime of the plants and prepare for future power upgrades. The means by which this existing infrastructure can be upgraded to produce more power. As mentioned, producing more power through upgrades 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 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 and 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 have 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 [indiscernible] engineers. This has enabled the company to improve financial efficiencies and drive the business back to adjusted EBITDA positive. We believe we are on the right path and 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 5-year contract with the expansion of specialized support services 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 has showed growth in the services we’ve historically provided this customer. Given the nature of the services, we are able to maintain solid margins as well. This business has definitely become a cornerstone for GSE, and we are delighted to serve the mission of Navy and the Department of Energy. As expressed in the last conference call, we continue to ring cost 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.