GSE Systems Inc (GVP) 2004 Q4 法說會逐字稿

Good day. All sites are on the conference line in a listen only mode. I would like to welcome you to the GSE Systems second-quarter 2004 results. At this time, I'd lie to turn the Miditron the conference over to Ms. Andrea Kantor. Go-ahead please.

Good morning. I'm Andrea Kantor, General Counsel of GSE. I would like to welcome you to GSE's year-end, 2004 financial results conference call. For your information, a question-and-answer session will be held at the conclusion of John Moran's presentation. Participants can e-mail questions at any time during the presentation to gsecall@gses.com. We will endeavor to respond to as many questions as time permits after John Moran's presentation. I will begin by reading a short statement.

These forward-looking statements that you will hear today reflect GSE's management's current views with respect to future events and financial performance that involve risks and uncertainties. We use words such as expects, intends and anticipates to indicate forward-looking statements. The actual future results of GSE may differ materially, due to a number of factors, including but not limited to delays in introduction of products or enhancements, size and timing of individual orders; rapid technological changes; market acceptance of new products and competition. These and other factors are more fully described in GSE's annual report on Form 10-K for the year ended December 31, 2003, periodic reports and registration statements filed with the SEC, including the annual report on Form 10-K for the year ended December 31, 2004. If any one or more of these expectations and assumptions proves incorrect, our actual results will likely differ materially from those contemplated by the forward-looking statements. Even if all of the foregoing assumptions and expectations prove correct, our actual results may still differ materially from those expressed in the forward-looking statements, as a result of factors we may not anticipate or that may be beyond our control. While we cannot assess the future impact that any of these differences could have on our business, financial condition, results of operations and cash flows or the market price of shares of our common stock, the differences could be significant. We do not undertake to update any forward-looking statements made by us. Again, if you want to submit any questions at any time, submit the questions to gsecall@gses.com and give your name and your affiliation. Now, I would like to introduce John Moran, GSE's Chief Executive Officer.

Thank you Andrea. Good morning and thank you for all for joining GSE's fourth-quarter and year-end results conference call. Joining me here in Columbia this morning is Jeff Hough, our Chief Financial Officer. First, our financial results. As reported yesterday, revenue for the quarter ended December 31, 2004 totaled $7 million, versus $8.3 million for the same period in 2003. This, unfortunately, reflects a continuing trend of large simulation projects, particularly in the power and military sectors, being delayed or in some cases canceled altogether. We expect this trend to continue through at least the first half of 2005. On a more positive note, for the year ended December 31, 2004 revenue was $29.5 million or 18 percent higher than the $25 million reported for 2003. In terms of net income, the Company produced an $85,000 loss for the fourth quarter of 2004 compared to a $1.2 million loss for the same period in 2003. However, for the year-end 2004, net income was a positive $118,000 compared to net income loss of 3.5 million for 2003.

We ended the year with a backlog of $19.6 million, up about $100,000 from the end of the third quarter, but down from the $30.4 million backlog at year-end 2003. We expect the backlog to improve over the course of 2005. I would now like to highlight some of the specific accomplishments that the Company achieved over the course of the year, with particular emphasis on the fourth quarter. In the first highlight, the Company produced a year-end profit from continuing operations for the first time since 1999.

Second highlight, revenue has increased from $20.2 million in 2002, to $25 million in 2003, to $29.5 million in 2004. This represents over a 46 percent increase over that 3-year period of time.

The third highlight, we invested heavily in business development and in diversification. These efforts have resulted in a robust pipeline of opportunities that is more diverse than at any other time in the Company's simulation history. Our challenge, again, in 2005 is to close these opportunities.

In the fourth highlight, we sought and successfully received our ISO 9000 registration, which is a significant recognition of the quality systems that we implemented over the course of the year.

Fifth highlight, we recognize China as the fastest-growing market for our core nuclear power plant simulation business and the Company positioned itself in 2004 for winning work in China, by taking a number of actions, including the establishment of a number of strategic relationships in China. Among these are agreements with the Shanghai Automation and Instrumentation Company, which is one of the largest instrumentation and control manufacturers in China and the Shanghai University of Electric Power, a prestigious university, were power plant operators receive qualification training. Both of these organizations are currently assisting us in closing China simulation opportunities.

The sixth highlight, in the fourth quarter, a major U.S. nuclear power plant supplier selected GSE in a competitive procurement process as its simulator partner for an advanced nuclear plant design. The new plant design is expected to be favored by the Chinese. Thus far, GSE has provided 2 full scope nuclear simulator proposals for the advanced plant design in China. These procurements are expected to be awarded in the fourth quarter of 2005.

Seventh highlight, in another strategic initiative, we succeeded in developing a preferred simulation vendor relationship with Emerson Process Management. Emerson, which is one of the largest digital control system vendors in the world, is particularly strong in the power industry. GSE delivered 2 fossil fuel simulators in 2004 for Emerson customers and has closed an additional 3 units, which are scheduled for delivery in 2005. In addition, a pipeline of over 15 Emerson-developed opportunities are currently in various stages of development.

Our eighth highlight is, our work with the U.S. nuclear navy at the Capital and Bettis facilities. This continued to grow throughout 2004 and we added $1.4 million of backlog in the fourth quarter from this work. In addition, in the same quarter -- the fourth quarter, the government selected GSE technology as the standard platform for the remainder of their long-term nuclear navy program. This program is scheduled to continue for at least 10 years. And then, the final highlight is that we invested business development dollars in the U.S. military and government market sectors. This is, perhaps, our most important diversification effort. While we have not closed significant business in this sector, other than the previously mentioned Capital and Bettis work, we've submitted over 12 proposals that the government is currently considering. That concludes the discussion on our 2004 highlights. What I would like to do now is comment on the general state of the business.

While I believe that our 2004 accomplishments are significant, the Company continues to face major challenges. While we ended the year debt free, we anticipate having to borrow to meet our cash needs over the course of the first 2 quarters of 2005. We also predict significant earnings pressure if projects that were projected to begin late last year and early this year continue to be delayed or canceled. In addition, we continue to face the considerable challenge of defining new markets for our simulation products and services. New nuclear plant construction, which is the primary driver for our core full scope simulation business, will not provide a sufficient number of opportunities for the Company to obtain its growth goals. As a example, even in China, where the most aggressive nuclear plant construction program in the world exists, that will produce only 3 full scope opportunities in 2005. And in that case, these will all be very highly-competitive procurements. So, in conclusion, while I believe that we've made some significant strides in 2004, we must continue to invest in our diversification efforts and that will put significant pressure on earnings. We must continue to cut our costs at every opportunity and preserve cash. And we must aggressively close on our pipeline of opportunities, in order for the Company to fulfill its expectations. That concludes my remarks and I'm prepared to take any questions that you might have at this point. Thank you.

Okay, we have our first set of questions from Bruce Zipper (ph) at Dakota Securities.

2004 had a lot of bids in the pipeline, that if one would have taken the Company to a new level of revenue. Unfortunately, to date, those bids did not develop into new contracts. What will that -- why will that change in 2005?

Well, Bruce, I think in certain cases, the procurements have slipped and, unfortunately, we -- GSE doesn't control that part of the bid and procurement process. I think on a positive note, not many of the contracts that we have counted on -- our high-probability contracts -- have been lost to competition. So it's either delayed or canceled. And what we are hoping is that the industries that we serve will improve, the moneys will be freed up to build the simulators that we believe we are in a good position to supply.

Second question -- again, these are all from Bruce. Can you give further guidance on first-quarter earnings and revenues. And as you know, Bruce, our policy is not provide guidance. We have a plan and we anticipate being on-plan for first quarter.

Can you discuss any specific bids now out there that look very promising and what the chances are for getting the contract and the time-frame for that decision?

Well, we have a number of very high-probability proposals that are in our pipeline and the schedule for their release is really throughout the year. The positive part is that they cross pretty much all of the sectors that we are interested in. I will give a few examples. The Emerson Process Management sales channel has really been one of the highlights -- successful highlights -- for 2004. And the 15 opportunities that we have lined up, they're all in the fossil area. But we have had a very, very high success rate. We anticipate winning at least 3 more, perhaps 4 more, of those fossil jobs throughout the year. We have a very, very high-probability simulator upgrade in the range of $5 million coming out of Leningrad, which we believe is very high-probability. We are in final discussions with South Africa on their Pebble Bed reactor design and we still are waiting patiently for the U.S. Navy to make their decisions on that major simulation project, which I'm sure is one of the projects that we have discussed in the past. And we are waiting on a day-to-day basis for that. Part of the issue in military is the war in Iraq. And it is basically taking many of the resources that the rest of the Armed Forces would otherwise be using for training and simulation systems. So there's not much we can do there.

Last question from Bruce. Does GP Strategy, as the major shareholder in GSE, offer any help in securing future business? Or are they just a passive owner?

Well, we have one other opportunity that we have discussed in the past is the training center concept, which we are actively marketing in the Middle East, in China and in Afghanistan. The concept is that we would create a simulation center, were many simulators plus the training for operators and maintenance personnel would reside. We have received some very positive news from Kuwait, as recently as yesterday, around that. But, does that mean that we have the job? No. And time-frame is tough to predict. But the point is, is that the reason we are able to bid the training center concept is because we are utilizing GP, which is of course a wholly-owned subsidiary of GP Strategies. We are utilizing their training materials and training expertise. That enables us to go into, for example Kuwait, and bid a full scope for simulation center -- GSE providing the simulators and GP providing the classroom and electronic training. So I hope that answered your questions.

Oh, one more question -- sorry. Is GSE considering any merger or acquisition situations that would enhance the Company's prospects and shareholder value?

The answer to that is, yes. We are evaluating -- we're continuously evaluating, as part of our strategy, the acquisition of companies that would help improve our prospects and improve shareholder value. I hope that answers the questions.

Okay, we have not received any further questions. So what I will do is conclude by thanking you all for participating on the conference call. And I look forward to speaking to you at the end of the first quarter. Thanks.

This concludes today's teleconference. You may disconnect any time and have a great day.