GSE Systems, Inc.

Good day and welcome to the GSE Systems Incorporated Report's first quarter of fiscal year 2021 financial results. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And 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 Mr. Adam Lowensteiner, Vice President at Lithium Partners. Please go ahead, sir.

Thank you, Chuck. Sorry, everybody, for the delay. Good afternoon, everyone. Thank you for joining us today to review the financial results for GSE Systems for the first quarter ended March 31, 2022. With us on the call representing the company today are Kyle Loudermilk, President and CEO of GSC Systems, and Emmett Pepe, Chief Financial Officer of GSC Systems. Before we begin, I would like to remind everyone that the statements made during the course of the call today 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, uncertainties, and other important factors that could cause actual performance or achievements to be materially different from those projected. For full discussion on these risks, uncertainties, and factors, you are encouraged to read GSC's documents and file with the Securities and Exchange Commission, including those set forth in periodic reports filed under the forward-looking statements and risk factors section. GSC 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 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 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 the call over to Mr. Kyle Loudermilk, President and Chief Executive Officer of GSE Solutions. Kyle, please proceed.

Thank you, Adam, and I'd like to welcome everyone to GSE's first quarter fiscal 2022 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'll plan on opening my remarks with a brief discussion on the industry, then drill down into commentary on the quarter's highlights and the status of each of our divisions, including our engineering segment, also known as Performance Improvement Solutions, workforce solutions, also known as Nuclear Industry Training and Consulting, or NITC, and our software-as-a-service-based software solutions business. Emmett will then give a recap of the financial results and will then open the call to any questions at the end. As it has been only 45 days since our last call, my commentary on the macro environment will be a bit abbreviated. Since our last call, the overall environment for GSE services continues to be promising. While Q1 displayed a bit of a breather after a very strong Q4 and a solid second half of the prior year, it still was a solid quarter consisting of, quote, meat and potato type of business, which is a steady stream of projects coming in. The macro environment continues to evolve from the worst parts of the pandemic, with businesses still transitioning to getting back to pre-pandemic levels. Our end user markets are focusing on the necessary improvements and maintenance required to keep the facilities up and running in the most efficient manner. The Omicron variant likely caused some delays in orders in the quarter, yet the high energy prices that are making headlines across the world continue to place emphasis on energy independence and security, while ensuring a stable grid in order to supply ample energy to customers. While many governments are currently focused on these issues, many are also focused on meeting decarbonization goals, which are additionally putting pressure on energy prices. That said, it's become very evident that many of these countries are rewriting their plans for both nuclear in the near and longer term. While incorporating renewable energy alternatives like wind and solar have been important, These energy sources are running into issues due to the variability inherent in those power sources and are struggling to meet long-term power generation goals due to the lack of equipment from supply chain issues, along with the lack of labor for installation, as well as obstacles to permitting. As a result, these shortages are putting serious pressure on meeting decarbonization goals. Making up for those losses from supply chain and labor issues could take many years, maybe even a decade or two, to catch up. This highlights the acute need and focus on nuclear power as a long-term component for energy security and meeting decarbonization goals for the grid. As I expressed in the past, in driving to a zero-carbon economy, wind and solar simply will not get the West there in and of themselves. Stable, consistent, round-the-clock power generation is required, and the more wind and solar that comes onto the grid, the more baseload power required. The solution to this is nuclear power. We believe that for these reasons, many countries will maintain and enhance existing nuclear fleets going for the foreseeable future. The good news is that when the lives of nuclear facilities are formally extended, at least in the United States, license extensions are usually issued for 10 to 20 years. Lifetime extension of nuclear power facilities is a very favorable trend for GSE for years to come, as these facilities constantly require upkeep, maintenance, and upgrades, as well as new software to make sure they are operating as efficient as possible. GST provides many of the essential engineering, design, workforce, and technology solutions to facilitate this industry effort. The Biden administration has laid the initial groundwork with a bipartisan bill that was signed into law in November for infrastructure. The law includes several billion dollars specifically allocated to the nuclear industry with a focus on investing for maintenance efforts at existing nuclear facilities. The law also provides funds to accelerate the advancement of next generation nuclear reactor technologies, including SMRs. We believe the dollars from this law are starting to make their way into the economy, but we are also appreciative of the U.S. government recognizing that upkeep of current nuclear fleet is of the utmost importance while bridging efforts to the next generation of nuclear facilities. As a reminder, nuclear power currently provides 20% of the nation's power and over 50% of the nation's 100% carbon-free electricity. As a result, the Biden-Harris administration has identified the current 93 reactors as a vital resource to achieve net zero emissions economy-wide by 2050. The U.S. Department of Energy, the DOE, recently released a Notice of Intent and request for information on the implementation for the Bipartisan Infrastructure Law's $6 billion Civil Nuclear Credit Program. The Nuclear Credit Program supports the continued operations of U.S. nuclear reactors, the nation's largest source of clean power. Both the NOI and RFI are critical first steps to help avoid premature retirement of nuclear reactors across the country, preserving carbon-free power generation at scale for the future while securing thousands of good-paying clean energy jobs. All of this commentary makes abundantly clear there is tremendous and broad positive momentum for the nuclear power industry. Energy security, zero carbon grid, and scalable sustainable growth of zero carbon is now top of mind across the world. As a result of specialized services and technology to industry, as a provider of those services and technology to industry rather, we believe GFC is well positioned as a result. One more topic I'd like to share about the macro level is the recent consolidation we are seeing in the industry, which resumes the consolidation we've been seeing prior to the pandemic. As an example, Westinghouse recently announced their intended acquisition of BHI Energy. As BHI has over 8,500 employees, this is a significant acquisition within the nuclear power industry. BHI has a range of services it provides in the U.S. and Canada, primarily servicing the support of all operating commercial nuclear plants. Another recent deal was the acquisition of Paragon Energy Solutions by Windjammer Capital Investors. Paragon is a small independent provider of critical parts and services for the nuclear energy industry and has been delivering products to nuclear utility customers and providers for over the past 30 years. Additionally, last fall, Boyne Capital acquired a majority interest in Sonic Systems International. Sonic provides a range of services to the majority of U.S. nuclear reactors, including non-destructive evaluation, QAQC programs, refueling and reactor maintenance, engineering, and project management. While the financial terms of these privately transacted deals haven't been disclosed, this deal flow is important to note, as clearly investment equity is flowing into this highly important sector. specialty assets serving the nuclear sector are clearly in demand. Now, let's dive into some of the key events GSE experienced in the first quarter. Key events in Q1 and market overview dynamics and new orders. Overall, the first quarter produced a good quarter. While quarters were not at the levels of Q4, new orders were solid for Q1, and we maintained our backlog. We suspect that orders ebbed after two strong quarters due to business cycles starting back up in our customers during the as well as likely sluggishness resulting from the Omicron and derivative of Faraday. We have seen over the last 24 months that this business can come in fits with any delays resulting in a spurt of business like we experienced in the back end of 2021. Even so, we are stable, as I mentioned, in the quarter, and we have lots of work ahead of us. Also, the software that we've built for the past few years into a material high-value line of business is now looking and feeling like a software business, including the typical timing associated with it. We had several renewals and new logo sales close at the end of last fiscal year, and Q1 involved a lot of business development activities to drive what we will be a solid Q2 in another strong year. As a result, investors should now look at our software business as a hockey stick as we progress through the fiscal year, just as it has the last few years. Our goal is for the X axis of this, excuse me, the goal is for the Y axis of this hockey stick chart to grow larger for each year, just as it has for each of the prior three years. This is exciting progress. Before getting a bit more granular, Q1 in general was a bit tepid for the industry. Admittedly, it was off the heels of a very busy second half of 2021. We believe customers took a pause, whether it be the Omicron variant or strong back half of 2021. Either way, it is an unusual industry to experience such spending puts and takes from quarter to quarter. The good news is we secured a solid cross-section of new orders in Q1, despite lower industry spent. In addition, some of our work that was expected to start at the beginning of Q1 was shifted to the end of the quarter or moved further to the right and should commence in the coming quarters. For the first quarter, total orders were 11.1 million, which was lower from Q4 and Q1 a year ago. That said, the industry has showed overall signs of renewed strength compared to the recent past. In the quarter, our performance engineering division managed to improve orders over last year as we continue to work with a variety of customers in different projects. The makeup of these orders were highly diversified by order type, primarily across our specialty engineering and non-simulation engineering businesses, and also relatively similar in monetary size thus the meat and potato aspect of a steady stream of orders workforce solutions is where we experience with work or in q 21. that said the division did win several key orders some sizable of nature we also made some new investments into the division during the quarter with the addition of sales and recruiting personnel and expect those investments to start contributing in the coming quarters as these resources should, quote, de-bottleneck our ability to generate revenue from the business. Although new order levels in pre-pandemic levels, we are very pleased to be trending in the right direction. The new orders awarded in the first quarter, combined with the acceleration we experienced in the second half of 2021, we feel has created great momentum for the remainder of 2022. Also, with the financing we conducted in the first quarter, GSE is in a very strong position to competitively bid for new business and make the necessary investments to improve organic growth through sales and product development efforts. Aligning our business has been a big effort through the pandemic, and now we have significantly improved our capital structure. One thing's for certain, three key catalysts still are at the forefront for the nuclear industry. One, the need for a stable grid. Two, the drive towards energy security independence, and three, the decarbonization of the power sector. The drivers have provided increased visibility of our business pipeline, and we are excited for the year. I'll remain an important catalyst for the power industry and will continue to gain momentum as we continue to suffer from higher energy costs and geopolitical issues causing energy security concerns. It is these catalysts that give us confidence that the nuclear industry will be in high and increasing demand for the foreseeable future. Now, let's review a bit into each operating segment. Our engineering performance, also known as performance improvement solutions, saw revenue decrease slightly sequentially from the fourth quarter and when compared to the year-ago period. Orders for this division continue to be robust in the first quarter to $6.4 million, up 15% from the same quarter a year ago. This increase was attributable to several new contract wins, specifically coming for our DP engineering and TrueNorth divisions. The specialized engineering services these two divisions offer are showing solid demand with an array of customers on an assortment of different engineering projects, from a transmitter replacement to assisting a client with remediation work on a tank bar. I highlight these wins as they have been able to show our breadth and depth of services and capabilities for our clientele. Looking further into the engineering performance division, our True North consulting and DP engineering units perform well compared to the first quarter a year ago as more customers are investing in these essential services that we provide to the industry. While the division is still in the midst of recovering from the pandemic, we're seeing customers start to put more work out to bid and inquire specifically of our unique solutions. There has been a large uptick in the opportunity pipeline as a result of this increased activity. Because of this, we have reason to be confident that the industry is emerging from the pandemic-related slowdown in spend and do expect additional business within this division over the longer term. Our pipeline opportunities overall for this segment has clearly improved as nuclear budgets and the focus on energy security and independence increases, and for good reason. As a result, our focus is working diligently with our customers and potential customers to convert these bids into orders and subsequently revenue as experienced during the quarter with several new key orders that we have received. For software solutions, moving on to our cloud-based SaaS solutions, as I've mentioned in the past, while this is technically categorized under our engineering performance division, it is a very exciting and unique component of our business and one which I believe warrants its own conversation. Revenue from our software solutions was $0.4 million for the first quarter compared to $0.8 million in the same quarter a year ago and compared to $2.4 million in the fourth quarter. As I mentioned earlier, our software business has developed into a nice division for GSE with lots of predictable high margin revenue. That said, given the conversion from licensed to SaaS over the past few years, many of the revenues from software ramps up towards the end of the year. GSE recognizes this revenue on a ratable basis for SaaS software quarterly over the lifetime of the contract. We made a significant push to convert our perpetual licenses to term licenses with our customer as well as capture net new business delivering the SaaS solution via the cloud. We've been successful in converting several of our clients to these SaaS-based license agreements, are in discussions with several more clients, and new opportunities about onboarding them with these solutions. We've already made investments in bringing on more people into our sales force, so we fully expect this investment to deliver further enhanced results in the second half of the year. It's gratifying to see what was a nascent effort when we first joined develop over the past three years into a significant and growing software business as part of GSE. We continue to be excited about these high-value, high-margin software solutions, which have demonstrated the potential for continued above-average growth rates while bringing strong predictability to the software license business. Last year, it represented nearly 10% of our total revenue for GSE, and we are focused on growing this business. It has proven to be an excellent follow-on to the company's legacy business of power plant simulators. In addition to the recurring revenue over software solutions, it provides very high gross margins, typically 80% to 90% for GSE. We are happy with our growth in this area and look forward to continuing the transformation to make this segment a larger part of our business. Workforce solutions. Now, moving to workforce solutions, also known as our NITC segment, Sales were $5.1 million in the first quarter, which was basically in line with the $6 million from the first quarter a year ago. Orders showed a bit of a pause in the first quarter, coming in at $4.7 million, due primarily to Omicron, which put some orders to the right, as clients paused certain decision-making to assess the impact to their respective workforce on-premise efforts. We continue to make smart investments in the business by adding new sales and recruiting professionals for the division in order to improve organic growth. Getting a bit more specific, the division did receive four key orders from our customers with two very sizable orders, one with a major utility and the other with a construction services company. So to summarize, I'm very proud of our team and the results produced in the first quarter. We clearly have additional work to do and are now in the position to do so with a strong balance sheet. We've begun to make necessary investments to be able to win more orders as they are starting to pick up, especially as the pandemic-related constraints end as time goes on. In the meantime, the company has been aligned to the market opportunities and our diversified business mix that we purposely built over the past few years has proven resilient throughout this time. We believe it has positioned the company to broadly benefit from the macro trends that bode very well for GSC's future. We are an essential part of the power industry ecosystem and our clients rely on us to keep their assets up and running while creating a highly efficient and safe environment. The strong reputation we have in industry and the relationships we maintain with our customers and the value-added engineering workforce and software technology we offer to industry should position us well to beat out the competition as more business flows into the vendor ecosystem for nuclear and broader zero-carbon power generation. As the industry continues to develop a resilient grid that will advance the goal of decarbonization, GFC is at the forefront of providing such solutions and ready to partner with the power industry to achieve these goals. In addition, industry tailwinds are extremely strong for GSE as governments and society is becoming educated to the fact that in order to achieve net zero carbon emissions and have a stable grid with energy independence, nuclear must be an integral and growing part of the solution. We've all read the headlines we are seeing today from the energy turmoil in Europe erupting as a result of the Ukraine-Russia conflict to climate change necessitating an accelerated path to zero carbon grid. Nuclear is now recognized as a critical part of the world's power mix. The industry news items that are previously shared are but a few of the many exciting developments in the nuclear industry right now that make me feel extremely confident about GOC's future. Our unique solutions are at the forefront of making nuclear power generation technologies and plants operate and run safely and efficiently and produce more power from those assets over time. I will now turn the call over to Emmett Pepe. GSC CFO, who will review the first quarter financial results. Emmett, please proceed.