GSE Systems' (GVP) CEO Kyle Loudermilk on Q4 2020 Results - Earnings Call Transcript

Mar. 31, 2021 10:10 PM ETGSE Systems, Inc. (GVP)
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GSE Systems, Inc. (NASDAQ:GVP) Q4 2020 Earnings Conference Call March 31, 2021 4:30 PM ET

Company Participants

Kalle Ahl – Investor Relations-The Equity Group

Kyle Loudermilk – President and Chief Executive Officer

Emmett Pepe – Chief Financial Officer

Conference Call Participants

Operator

Greetings and welcome to GSE Solutions’ Fourth Quarter and Year End 2020 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

I would now like to turn the conference over to your host, Kalle Ahl of The Equity Group. Thank you, you may begin.

Kalle Ahl

Thank you, Dallan; and good afternoon, everyone. Thank you for joining us today. 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 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. 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 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 now like to turn the call over to Mr. Kyle Loudermilk, Chief Executive Officer of GSE Solutions. Kyle, please go ahead.

Kyle Loudermilk

Thank you, Kalle. I'd like to welcome everyone to GSE's fourth quarter and full year 2020 financial results conference call. Joining me on today's call is Emmett Pepe, our Chief Financial Officer. Earlier today, we issued a press release covering our fourth quarter and full year 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.

We finished 2020 on a very encouraging note. The fourth quarter adjusted EBITDA, improving to positive $1.1 million compared to three straight quarters of negative adjusted EBITDA at the start the year, amidst the onset of the global COVID-19 pandemic. This is really good news demonstrating that GSE can achieve positive adjusted EBITDA, even amidst COVID-19 significant business impact toward top line revenues in the quarter.

I'm proud of our team's resilience and ability to work through the industry-wide project delays and work stoppages caused by the pandemic this year. Our ability to end the year on a positive note is also a direct result of a multi-year effort to intentionally align GSE to a broad set of essential services for the industry. Our priority during the pandemic has been the health and wellbeing of our employees and customers. I also am proud of our efforts to keep our offices open as essential services, to enable employees to work from home through effective use of technology, to pivot, to remote work when possible, and to keep engaged with coworkers and customers via effective use of technology and critical onsite visits.

Given the growing decarbonization movement, which I will touch on later, we are very bullish about our long-term prospects. We also have reason to be optimistic about our outlook for 2021. Fortunately, we started to see a meaningful upswing and bidding activity at the end of the year, which has continued into the first quarter of 2021. In December our NITC Group won two master service agreements with a major U.S. utility for a combined budgeted value of $35 million over two years. We anticipate that work under these agreements, which is not yet reflected in our new order or quarter end backlog will start to ramp as we approach the end of Q2 and continue to build in the second half of the year.

We have provided staff augmentation services to this longstanding customer for many years. And these significant agreements expand our mandate to include qualified engineering services. We'll be supplying the client with highly skilled field professionals, engineers and maintenance and operation support personnel among others to deliver services on both nuclear and non-nuclear related projects.

The NITC team continued its momentum in January, winning three additional contracts with a combined value of $8.7 million to provide specialized training and staffing support services for large energy companies. In all of these wins, we beat out tough competition, reflecting our elite nuclear expertise, personalized approach to customer service and proven track record of providing the best people available to industry. In performance solutions, we continue to successfully grow our cloud-based SaaS revenue stream in the fourth quarter. In particular, we were very pleased that a large U.S. oil company commenced a multi-year subscription to our EnVision on-demand software simulation and training platform.

EnVision computer-based tutorials with high fidelity simulation models allow the customer to conduct critical training anytime, anywhere in the areas of process fundamentals, as well as Sulfuric Alkylation, Amine Treating, Fluid Catalytic Cracking, and Sulfur Recovery. We've made significant progress in our efforts to grow our software revenues, which is great news. This has increased 34% to $3.9 million in 2020, compared to $2.9 million in the prior year. I cannot overstate the importance of this progress. We intentionally put in place a strategy to expand our license revenue and do so such that the revenue would grow as a recurring annuity.

The SaaS business model provides us with recurring and predictable revenue, scalability, and for our investors potential hidden value, considering the market valuation multiples for similar platforms. The pandemic has increased our client's interest in flexible, decentralized simulation and workforce development solutions that are underpinned by a robust technology and deep subject matter expertise. Our SaaS customers require only a web browser and internet connectivity for the end user, enabling the client corporation to eliminate the burdensome and costly management of on-premises technology. So as long as the subscription is active, our clients benefit from our essential high value solutions. This business model ensures a very sticky, recurring and growing revenue stream for GSE.

Further emphasizing this demand from industry, just yesterday we announced that another longtime customer, a major Canadian energy company has contracted with GSE to upgrade their on-premises training platform to our new EnVision software as a service subscription solution. Conversion of perpetual licenses to subscription licenses is a win-win for the customer and GSE for the aforementioned reasons. We are very excited about this progress and are investing in our solutions’ roadmap for further growth in 2021.

New orders for 2020 totaled $7.9 million, consisting of $4.4 million for performance improvement and $3.5 million for NITC. Our total backlog at the end of Q4 stood at $40.4 million consisting of $30.3 million for performance improvement and $10.1 million for NITC. While these figures are below pre-pandemic levels, we see signs that our backlog is leveled out and we expect to see improvement throughout 2021 as our recent NITC contract wins begin to appear in our new orders and backlog numbers, and as we win new business in both segments.

We have seen bidding activity pick up already in 2021. If we are successful converting bids to wins, we would expect a significant rebound in both our NITC and performance improvement segments in the latter part of the year. At the end of 2020, our team undertook a deep dive to evaluate our growth strategy for 2021 and beyond. The result of this effort is a compelling solutions roadmap that we have highlighted in our most recent investor deck. We're very excited to execute our organic growth roadmap in the new year.

The organic growth strategy and solutions roadmap is comprised of three key elements; build, integrate, and expand. Build, entails building upon what has historically worked for GSE through continuing to deliver our essential services to industry. Integrate, entails integrating our solutions as one company, as we go-to-market. We have aligned and streamlined ourselves to ensure that we are one company delivering comprehensive and integrated solutions to the market. We're focused on effectively cross selling and upselling to existing customers and traditional end markets such as nuclear and potential expanding into adjacent markets. Expand, we've gone through a detailed process of defining the new collaborative service and technology products that will provide significant value add to industry in a unique and compelling manner.

We are seeing promising traction for new solutions, such as thermal performance monitoring, data validation and reconciliation and other new solutions that entail our essential services and unique licensable technology. These solutions lead us to the broader decarbonization market as our customers are moving swiftly to decarbonize their power generation. We're well positioned for this, and we expect to have some exciting news on this front as the year unfolds. Now focusing on organic growth, we can effectively target investment in the business while continuing to manage our balance sheet. Our cash and equivalents totaled $6.7 million on December 31, providing a sufficient financial flexibility to manage the business. This is a solid foundation for us as we proceed through 2021.

As 2020 demonstrated we are fortunate to have a unique and durable business that provides essential services to a diversified group of blue chip clients in an industry with very high barriers to entry. Our existing client relationships are becoming even stickier as we provide them with an increasing number of new solutions. Looking ahead, we expect to benefit from several important industry drivers, including the de-carbonization of the power industry. The deployment of Small Modular Reactors known as SMRs, and the widening skills gap and aging nuclear power workforce. The new administration stands on clean energy, including proposed increases in public spending for carbon free energy sources, including nuclear as a targeted area of investment for the recently announced American jobs planned is a very clear industry tailwind.

In February the U.S. made an official return to the Paris climate agreement, which is designed to limit greenhouse gas emissions and address global warming. To reach a carbon free power sector by 2035 and a net zero economy by 2050, U.S. nuclear energy must play a major role, and GSE is a key enabler to this industry. Another key driver within the industry is the development and deployment of SMR technology, which has gained significant tractionable. For example, in September 2020, the U.S. nuclear regulatory commission improved the first SMR designed by new scale, which is an existing GSE customer. We're supporting new scale with simulation technology and engineering services solutions.

New scale estimates that its first SMR based in Utah could be operational by 2027. These reactors had key advantages and that they are smaller, factory built, modular, cheaper, easier to build, and generally proceed as safer than traditional reactors, while having greater reliability than wind and solar energy. Another recent SMR news just last month Montana Senate Committee voted to pass a feasibility study for replacing coal-fired power generation of Calstrip power plant with SMRs, while U.S. Representative, Mike Simpson called for breaching four Snake River dams to restore salmon ecosystems as well as replace energy for those dams resources such as SMRs. In October 2020, the US DOE awarded $160 million to build working models of small-scale advanced nuclear reactor designs, and in December announced another $30 million of initial funding under its new advanced reactor demonstration program. Further investment into advanced nuclear is highlighted in the American jobs plan.

Finally, the U.S. Energy Industry is expected to lose a large percentage of its workforce as baby boomers retire. This should present greater opportunities for our business over the next several years, as utilities will look to vendor expertise to fill the gap. We are well positioned to identify and provide solutions that offer highly qualified professionals for both short and long-term assignments, whether due to an aging power workforce or due to other short-term spikes in demand for special skills.

In closing with these very clear industry tailwinds in our favor and given our very unique position as a heavily tech enabled provider of essential services to the de-carbonization of the power sector and nuclear power industry, we remain very confident in our opportunity to create substantial long-term value for and shareholders alike.

In the near term, we intend to continue to drive organic growth as described, streamline our operations containing costs, manage our balance sheet and maximize cash flow. We're optimistic that 2021 will be a much stronger year for our industries project activity rebounds and for our company, as we execute on our very exciting growth strategy.

I'll now turn over the call to Emmett Pepe; our CFO who will reviewed the fourth quarter financial results. Emmett, please go ahead.

Emmett Pepe

Thank you, Kyle.

Total revenue in Q4 2020 was $12.7 million compared to $17.3 million in Q4 2019, reflecting a $1.6 million decrease in our performance improvement segment revenue and a $3 million decrease in our NITC segment revenue. The decrease in performance improvement revenue was driven primarily by COVID-19 related headwinds and our inability to commence certain projects remotely. The decline in NITC revenue was primarily due to COVID-19 related project delays and stoppages and lower staff augmentation needs from customers during the quarter.

On a sequential basis, our Q4 2020 total revenue remained essentially flat compared to Q3 2020 total revenue. And we believe we are well positioned to build on this revenue base as we progress through 2021, given recent contract wins and the recent increase in bidding activity, Kyle mentioned earlier. Gross profit in Q4 2020 totaled $3.8 million compared to $5 million in Q4 2019. Performance improvement gross profit declined by approximately $289,000 year-over-year to $3.2 million; NITC gross profit decreased by approximately $944,000 year-over-year to $634,000.

Our overall gross profit margin increased year-over-year, despite the challenges caused by COVID-19 pandemic. We were able to adapt our cost structure quickly to counteract the revenue declines caused by the industry-wide project delays and stoppages. Credits given to the entire organization for being agile in 2020, while we face historic level of uncertainty. SG&A expenses, totaled $3.2 million in Q4 2020 versus the comparable figure of $3.9 million in Q4 2019. The decrease in SG&A expenses was primarily driven by lower business development costs. We are currently in the process of back office systems overhaul to fully integrate all of our subsidiaries onto one platform. This is an exciting project that will allow the corporate function to better support the businesses as they execute the organic growth strategy that Kyle outlined. As these systems begin to come online in 2021, we anticipate that there will be synergies to capture that will further reduce our cost structure.

Operating loss equaled approximately $1.2 million in Q4 2020, compared to an operating loss of approximately $1.6 million in Q4 2019. Non-GAAP adjusted EBITDA as defined in our earnings release totaled approximately $1.1 million in Q4 2020, compared to an adjusted EBITDA of $1.2 million in Q4 2019. Q4 2020 results are a significant step toward normalization post COVID. We're very pleased that we nearly reached break even for the full year 2020 after three consecutive quarters of negative adjusted EBITDA.

Also wanted to highlight the turnaround at DP Engineering, which produced positive EBITDA in Q4 2020. Now that we have right sized the DP Engineering business we are excited to continue to grow on that base using the outline that Kyle detailed surrounding our organic growth strategy. DP Engineering provides another central service to the nuclear power industry that further deepens our service offerings. We have been prudently managing our balance sheet. During 2020 we paid that $18.5 million of our long-term debt, and at quarter end our net debt totaled $6.4 million consisting of $13.1 million of debt, $6.7 million of cash.

The total debt includes approximately $10 million that we received earlier this year under the paycheck protection program. We have used these funds for payroll related costs, rent, utilities and other permitted uses. As of December 31, 2020 we were in full compliance with all requirements in order to apply for forgiveness under the PPP loan. We applied for forgiveness of this loan in the first quarter of 2021. And our application has been approved by the bank and is currently waiting for approval by the SBA. We anticipate a response in the second quarter of 2021. Exclusive of the $10 million paycheck protection program loan, which we continue to believe will be forgiven; our net cash balance would be $3.7 million. We believe we have sufficient cash and working capital available to support our ongoing business.

In Q1 2021 it's been a very busy quarter for Kyle and me with investor presentations and conferences. We look forward to continuing these efforts throughout 2021 to further publicize the positive work GSE is doing especially considering the renewed push surrounding decarbonisation. On a final note today, we filed 12b-25 notification of late filing as the company requires additional time in order to be able to file a complete and thorough annual report. That said we expect to file well within the extension window.

I'll now turn the conversation back to Kyle.

Kyle Loudermilk

Thanks very much, Emmett.

Operator, please open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Since there are no further questions at this time, I would like to turn the call back over to management for any closing remarks.

Kyle Loudermilk

Okay. I just like to thank everybody for joining us. We appreciate your time and interest in GSC, really very pleased with the quarter and very excited about what's ahead of us in 2021. If you have any questions, please reach out to our IR from, the equity group and we'd be happy to schedule a follow-up call. Thanks again, everyone. Be safe, and we look forward to speaking with you all soon, ticker.

Operator

And with that, this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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