GSE Systems, Inc.

Good day and welcome to the GSE Systems Incorporated Report Second Quarter Fiscal Year 2023 Financial Results. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Adam Lowensteiner, Vice President, Athletes and Partners. Please go ahead.

Thank you, operator, and good afternoon, everyone, and thank you all for joining us today to review the financial results for GSE Systems for the second quarter fiscal 2023 ended June 30th, 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 meeting. of Section 27A of the Securities Act of 1933 as amended in 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're encouraged to read GSC'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 in a company's earnings release. With that, I'd like to now turn over the call to Mr. Kyle Loudermich, President and CEO of GSC Solutions. Kyle, please proceed.

Thank you, Adam, and I'd like to welcome everyone to GSC's second 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 today's agenda, I'll start with a brief update on the industry and the quarterly results. 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 national and global basis continues to grow and be in high demand, especially given the higher temperatures that countries have been experiencing this summer. As a result, utilities have been busy making sure there's an ample supply of power to meet this demand. While certain fossil fuels are being utilized to meet peak load, governments understand that dependence on fossil is not a sustainable long-term strategy, and the value proposition of nuclear power continues to be top of mind. As a result, many countries continue to prioritize nuclear power through planning and investment to sustain existing nuclear infrastructure, investing to produce more power from this infrastructure, and advancing plans to build out a new generation of nuclear power plants. The economics for nuclear are becoming more compelling in light of geopolitical issues. The invasion of Ukraine highlighted the fragile nature of fossil fuel dependency and increased baseline consumption of fossil fuels resulting from a growing global economy also puts upward pressure on costs. This puts into clear contrast the sustainable and secure power that nuclear assets provide to achieve energy security, while providing abundant affordable power. A recent case study of these benefits is being witnessed in Finland. With the recent completion of the Okolito 3 nuclear power plant, Finland's first new nuclear power plant in more than four decades, the power it now provides has begun to lower electricity costs in the country, which soared after the Finnish government banned electricity imports from Russia. The plant, which will produce up to 15% of the country's power demand, has enabled electricity spot prices to fall by 75% from the beginning of December 2022 to April 2023. Another country that is seeking to expand its nuclear power footprint is Canada, which plans to achieve a net-zero power grid by 2035. To get there, utility companies are already preparing, with Canadian-based Bruce Power announcing assessment plans to add another 4.8 gigawatts to its current 6.2 gigawatt facility in Tiverton, Ontario. If approved, this would be the first conventional nuclear power plant in the province built in three decades, and the site would eventually become the largest nuclear power generation facility operating site in the world. The United States has achieved a fantastic milestone recently with Southern Company's Vogel III nuclear reactor in Georgia now commercially producing power. This is the first new built nuclear power plant in the United States in 30 years and has created tremendous excitement throughout the industry. Vogel Unit 4 is nearing completion and expected to go commercial early next year. This is a great achievement for Southern Company and the industry and GSE. Also, as I highlighted on the first quarter conference call, if you go into the control room of these new reactors, it's a complete digital control room, nothing like the prior generations of nuclear power plants. GSE technology is used as a basis for the simulation systems for AP1000s, and we are proud to be part of the journey. This transformation to digital control rooms will play out in existing nuclear power plants as well. As older power plants obtain operating extensions, we believe the industry will go through a transition whereby those old control systems are going to transition to digital control systems for greater operational reliability, safety, and to achieve optimal power generation. These upgrades require investments in the hundreds of millions of dollars per plant and will touch upon every service that GSE can offer, from simulation to design modifications to programs and performance to workforce solutions. We have had a series of press releases over the past months that highlight recent wins across our lines of business, including a significant win to assist a client to upgrade procedures for their plant as they transition to a digital control environment. Some more color on the recent workforce solutions win. Subsequent to second quarter's end, we announced a contract valued up to $15 million over several years to support a project to modernize the nuclear power plant's main control room to a digital environment. This contract was with one of the largest nuclear operators in the United States, and we are excited to play a critical role in this transformation. Other plants have announced similar plans 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 into a clear industry trend. As mentioned, the conversion to digital controls helps the plant operate more efficiently, safely, and reliably. The investment also helps set the stage to extend the lifetime of the plants and prepare for future power upgrades, a means by which existing infrastructure can be upgraded to produce more power. Producing more power through upgrades is an extraordinarily cost-effective means to produce more nuclear power versus building new plants. Looking a bit further into the future, there's continued momentum around the development of small modular reactors, known as SMRs, which would be inherently safe to operate while requiring a smaller site footprint than traditional nuclear power plants. SMRs will be the wave of the future, and GSE is prepared to participate in helping these new facilities come safely online. Britain recently announced it's seeking to improve their nuclear footprint to meet certain climate targets and improve energy security through SMRs. Since large new projects are very costly, the British government recently opened a competition to develop SMRs and is aiming to see them operational within the next decade. Their stated goals increased nuclear power capacity to 24 gigawatts by 2050, which would put nuclear at 25% of electricity output versus 14% today. It is news like this that is great for the industry and shows the next wave of plants to be built for the nuclear industry will involve significant SMR opportunities. Now for some perspective on GSE's business in Q2 of this year, 2023. The highlight of the second quarter was the meaningful improvement in our operational results. The engineering teams in particular kept a keen focus on utilization, and this had a direct contribution to improved company performance. As the team began to execute on the significant orders 1 and Q1, the company performed at a high level, resulting in financial improvement when compared to the first quarter and second quarter from one year ago. While we have more work ahead of us, we continue to focus on improving what is in our control, including keeping corporate costs down and ensuring we are properly staffed for the business we have and anticipate moving forward. Q2 orders were lower than we were looking towards due to some key orders not closing in the quarter, but those orders that slipped have closed in early Q3, and we have highlighted several of those ones in recent press releases. We also took some costs out of the business to ensure we are as lean as possible moving forward and that we'll provide more details on these initiatives. Focusing a bit more on the highlights of the second quarter, the company's performance engineering division continued to improve, especially including year-to-date software and support sales of $2.3 million, up from roughly $1.9 million in the same period a year ago. We are very pleased with the continued pace of software sales. New orders overall for performance engineering during the second quarter were $4.9 million, which is an increase of 30%. when compared to 3.9 million in the second quarter of 2022. While the order flow has obviously been lumpy from quarter to quarter, we feel that the increase in orders from the engineering division, when compared to the same period a year ago, perhaps demonstrates a tentative recovery in industry spend in this area, even if lumpy. Our workforce solutions business continues to experience softness in demand. The segment had revenue that was 3.3 million in the second quarter compared to 3.9 million in the first quarter, and lower from $4.8 million in the second quarter in 2022. We have worked diligently to retool the division by rebuilding sales and recruiting teams for the business, but it continues to struggle, and it's difficult to predict when it will turn. We have identified a book of business in the marketplace and need to execute, but competition is very broad-based, and in general, the industry is still in a wait-and-see mode, but for essential projects, such as the digital control project when we highlight it. We are focusing on staffing up that project as fast as we can, but of course, this ramp depends on the customer readiness to accommodate that ramp. We are closely monitoring the division and prepared to retool if it doesn't improve. Across the business, we are focusing on what is in our control and demonstrating improvement. We're focused on utilization and hard margin business. We see that in this quarter. This focus has yielded improved results for the quarter and revenue generation for engineering and overall gross margin improvement in the business. We have been laser-focused to contain costs, trimming overhead where we can, and shedding or reducing external costs, which should have an impact in the second half of the year. We also are focused on engaging with customers on specific opportunities. Our business pipeline is strong, and while we're not in control of client decisions to move forward on projects, we are ensuring we are along with them and ready to execute when projects are rewarded. This focus has helped us build our opportunity pipeline and win a significant new customer logo the uranium enrichment customer when we announced, and that is not an easy thing to do in the nuclear ecosystem. I'm proud of our accomplishments and improvements in the second quarter. I believe they demonstrate that we are focused on turning this company around. While we wish that momentum was building faster, we do continue to make progress to reaching our goals of increasing orders, backlog, and grow revenue. The new orders already received and announced in the third quarter are a step in the right direction. I'll now turn the call over to Emmett Pepe, GSE CFO, who will review the second quarter financial results. Emmett, please proceed.