GSE Systems, Inc.

Good day, and welcome to the GSE Systems, Inc. Reports third 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 one on a touch-tone phone. 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 Adam Lowensteiner, Vice President at Litham Partners.

Please go ahead. 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 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 GSE's documents on file with the Securities and Exchange Commission, including those set forth in periodic reports filed under the forelooking statements and risk factors section. GSE does not intend to update or revise any forelooking 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 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. 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, the 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 will conclude with a 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. who believe that given the nature of the economy, non-essential projects within the power industry are being canceled or put on hold. Many cleantech 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 current inflationary environment and labor-constrained environment. So where does that leave the industry? While interest rates fluctuate, they aren't returning anytime soon to prior levels, and as a result, we're witnessing a shift from new project mode to need to refurbish, upgrade 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 new build given the economics, complexities, and extended timelines 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 plant as they transition to a digital control environment, 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 plant's main control room to a digital environment. This contract is with 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 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 to a clear industry trend. As plants convert to digital control systems, they will 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. 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 in 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 billable engineers. This has enabled the company to improve financial efficiencies and drive the business back to adjusted EBITDA positives. We believe we're 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 five-year contract for the expansion of specialized support services to two 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 shown growth in the services we've historically provided this customer. Given the nature of the services, we are able to obtain 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 wring costs out of the business and made key strides to lower expenses compared to the second quarter a year ago. When adjusting for one-time costs of approximately $1 million during the quarter that are non-recurring in nature, our expenses are at a much improved level. This helps to put the company on better footing going forward. Emmett will provide more details on our cost management initiatives in his remarks. The company's performance engineering division continues to demonstrate improvements with a nice stream of wins of new business, many of which we have announced during the quarter and recently, wins of strategic new logos, expansion of engineering services to provide value added to a uranium enrichment company, two nuclear operators in Texas, just to name a few. The performance engineering division also is where we have our software and support sales, which were $1.4 million during the quarter and $3.7 million year-to-date, up 3% from the same period a year ago. As we mentioned in the past, the software side of the business has provided excellent margins and now represents a growing annuity. It's beginning to look much like a software business. New orders for performance engineering during the third quarter were $13 million, significantly higher from the second quarter, which were $4.9 million, due to timing of some orders that closed in Q3 instead of Q2. With that said, year-over-year increases in orders were better for the division, which were compared to $7.2 million. We feel that this improved order flow for engineering and services and technology licenses is a leading indicator that industry is slowly ramping back. The improvement, I feel, also demonstrates GSE's tenacity in being able to develop and win more business through tight interaction with customers, and I'm proud of the team effort here in promising early results of our alignment with the markets. Our workforce solutions business continues to experience challenges. Segment had revenue of $2.9 million in the third quarter of 2023, sequentially lower from $3.3 million in the second quarter and compared to $3.8 million one year ago. While we have retooled the division as expressed in prior conference calls, the division continues to lag as customers are still being selective with regards to on-site staff augmentation services. We have aligned this business to critical new opportunities in nuclear, such as the $15 million project win highlighted earlier. We're eager for clients' spend on the project to ramp as their supply chain challenges get addressed. We did have some solid order flow in the quarter, which were offset by early project terminations by customers in the tune of $1.7 million. It's hard to predict or estimate any early project terminations, but it is an inherent part of this business as customers either complete projects or allocate funds to different projects that may be deemed as a higher priority. While these challenges persist, I'm pleased that the division, despite lower volumes, reported a break-even quarter on an adjusted EBITDA basis. This gives us some solace that the division has potential upside when customers start to ramp up spending on certain projects. To summarize, we have successfully right-sized the company in order to improve our utilization on an ongoing basis. I believe the third quarter really demonstrates that success. It was our first adjusted EBITDA positive quarter in two years and our strongest positive adjusted EBITDA quarter since 2020. We continue and engage with as many customers and potential new customers as well. We are making sure that we are the vendor of choice in educating them in the breadth of services we can offer them by using GSE as a key provider. Our recent contract wins announced over the prior weeks demonstrate mean goal progress in this dimension. Our business pipeline continues to remain strong, and while we're not in control of client decisions to move forward on projects, we are doing all we can to engage with customers and prospects and develop wins. While the industry spend is still at a very conservative level compared to pre-pandemic norms, things are improving at GSE for order flow on the engineering side as a result of our efforts. Our GSE new order flow for the first nine months so far of 2023 is $39 million. This equals the order flow for the entire year of 2022. We are optimistic this momentum will continue. I'm proud of our team's accomplishments in driving improvement in the third quarter. I believe this demonstrates we're focused on turning this company around. While we wish that momentum was building faster, we do continue to make progress towards achieving our goals and increasing orders, backlog, and revenue growth. The new orders already received and announced in the third quarter are a step in that right direction. I'll now turn the call over to Emmett Pepe, TSE's CFO, who will review the third quarter financial results. Emmett, please proceed.