GSE Systems, Inc.

Welcome to GSE Systems, Inc. Report's first 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 today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Adam Lowenstein with Loisum Partners. Please go ahead.

Thank you, Debbie, and good afternoon, everyone, and thank you all for joining us today to review the financial results for GSE Systems for the first quarter of fiscal 2023, ended March 31st, 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 I 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 risk and uncertainties and other important factors that could cause actual performance or achievements to be material or different from those projected. For 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. 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 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 on 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 GSC Systems. Kyle, please proceed.

Thank you, Adam, and I'd like to welcome everyone to GSC's first 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'll start with a very brief update on the industry and the quarterly results, as it's only been a few weeks since our last conference call. Emmett will review the financial results, and we'll conclude with a Q&A session. First, a brief update on the industry. Demand for electricity on a global basis continues to grow, and as a result, governments are seeking to make sure there's an ample supply to meet this demand. In addition, many countries are looking towards something that produces clean energy to keep their carbon profile to a minimum. These trends are driving a new renaissance towards the consumption of nuclear power. As a result, in the near term, we continue to see more facilities looking for license extensions to operate and investigate capital investments to produce more power in what is called an upgrade. We believe there is a shift occurring within the industry from decommissioning to filing for extensions to keep operating for the foreseeable future. Recently, I met with the CEO of a major utility operator, and he told me five years ago, I was planning to shut down a number of plants. Today, I'm not only looking to extend their lifetimes, but to invest significant amounts of money over the future to produce more power from them, end quote. This gentleman said that he's not seen a more optimistic outlook for the industry since the 1980s when he began his career. Last conference call, I highlighted X-Energy's North States Power in Minnesota as an example, which recently applied for a 20-year operating license extension for its Monticello reactor, which currently runs through September 2030. This would be the facility's second 20-year extension, and if granted, we'd keep the facility open through 2050. In recent weeks, there has been discussion in Michigan to restart the 800-megawatt Palisades nuclear power plant, which is currently being decommissioned. This would be possible with the help of federal dollars from the infrastructure bill signed into law in November 2021. In addition to potential federal dollars, the state of Michigan has announced it would provide up to $300 billion to assist in reopening the plant in order to meet key climate goals. This news demonstrates the value nuclear power is bringing to the industry. clean, and consistent power. Also to reiterate, during the first quarter, the Vogel III nuclear reactor in Georgia is the first nuclear reactor to go critical in seven years in the U.S. and the first new build in 30 years. Unit 3 is now coming into full service, and Vogel Unit 4 is nearing completion and expected to start up early next year. This is a great achievement for Southern Company, the industry, and GOC. Also, if you go into these control rooms and look at these new reactors, and the control systems is complete digital control room, nothing like the prior generations of nuclear power plants. As older nuclear power plants obtain operating extensions, we believe we're going to go through a transition where those old control systems that are analog are going to transition to digital control systems. These upgrades will require investments in the hundreds of millions of dollars per reactor. This is exciting for industry as the digital control systems allow the operator to produce more power reliably, efficiently, and safely. This is a Good news for GSE is this creates significant opportunity to sell our solutions across the board from simulation to engineering, design, and analysis, programs, and performance. This is a long-term trend that is only now emerging and in the planning stages, and we are eager for industry to broadly move forward. In the longer run, there's continued momentum around the development of small modular reactors, which would be inherently safe to operate, while requiring a smaller footprint than traditional nuclear power plants. It is no doubt that SMRs will be the way to the future. On this front, recently Westinghouse has announced plans to enter the SMR marketplace with plans to create its own SMR called the AP3000. The company is leveraging its know-how, and this action acknowledges the significant market opportunity for SMRs at the 300 megawatt scale. This is great news for the industry and shows the next wave of plants built for the nuclear industry will involve significant SMR opportunities. The macro outlet for nuclear energy continues to remain positive. Global awareness of the importance of nuclear power for energy security, environmental equity, and grid reliability is driving further action to sustain existing nuclear power fleets, produce more power from those assets, and accelerate the path towards adoption of next generation nuclear power technology. While it takes significant time for industry to move through the planning process to project execution and spending, we feel that the industry is entering a major cycle of long-term investment for growth barring any major disruption. Now for some perspective on GSE's business in Q1 of the fiscal year 2023. The highlight of the first quarter were the new orders awarded, which was 19.1 million, the highest in nearly three years. As a result of these new orders, we have refilled the company's backlog to nearly 41 million, the highest level in over a year, which is very helpful to our organization for the remainder of 2023. While we hope to win some of these orders sooner, We're pleased to have won this business in Q1 and expect these orders to be converted into revenue during the coming quarters. As a result of revenue lagging orders, operationally the first quarter was similar to that of Q4. While the company's performance needs to improve, we believe we have a good opportunity to deliver better results with the new orders received in the first quarter. Focusing a bit more on the highlights of the first fiscal quarter, the company's performance engineering division continued to show contributions especially including software and support sales of 1.2 million, up from roughly 400,000 in the first quarter of 2022. Many of the new orders received in the first quarter are for performance engineering services. New orders for performance engineering during the first quarter were 14.7 million, an increase of 130% when compared to 6.4 million in the first quarter of 2022. This is good news. We're pleased with this trend. We feel this reflects what we're seeing in the industry. tentative initial investment in engineering services as broader investments will play out over the years to come. The major deal that closed in early Q1 is a renewal contract that includes a meaningful expansion of services with two U.S. government engineering laboratories dedicated to supporting the U.S. Navy. This is a five-year contract that has options to make it worth up to $28 million over that time. GSE has been under a series of service contracts with these laboratories for over 20 years, and this renewal is a testament to the strong relationship we have created with these laboratories and the essential value these services delivered over that time. We're proud to serve the mission of these important national assets. Another significant win is the recent announcement of the upgrade of the training simulators at the Okilioto Nuclear Power Plant in Finland. This contract, which is worth nearly $900,000, is expected to deliver key new capabilities for TBO once completed over the next two years. Moving to our workforce solutions business, which has had its challenges during 2022, is continuing to slowly improve. Revenue was $3.9 million in the first quarter, which is still lower than the year-ago level, but improved sequentially from the fourth quarter, which was $3.3 million. As I've expressed in the past, we spent the majority of 2022 retooling the division by rebuilding the sales and recruiting teams for this business. We're still in the midst of turning around the division and more needs to be done to continue the momentum here. Now I'd like to discuss in our focus on sales and revenue recognition. While revenues in the quarter weren't at our historic levels, new orders were, and we believe that demonstrates the customers have worked to conduct and are making their way back to spending. While this doesn't mean we're out of the woods, nuclear isn't going away, and our discussions with our customers and new prospects continue as they are still in the planning stages for future capital spending on their facilities. As a result, we're eager for spending to recover to higher levels, and we're in front of these companies to align their needs and our capabilities and promote the value that we can provide. Continued strong license revenue accompanied by recent improved orders and bookings are the result of being out in front of customers and being aggressive to win the business that is available. By being in front of customers, we feel we're setting the stage to get more business as industry spend recovers. To summarize, while we wish the momentum was building faster, we do continue to make further progress to reaching our goals of increasing orders, backlog, and a tick up on revenue. The new orders received in the first quarter are a step in the right direction and places the company in a solid position for improved performance. I'll now turn the call over to Emmett Pepe, GSE CFO, who will review the first quarter financial results. Emmett, please proceed.