GSE Systems Inc (GVP) 2012 Q1 法說會逐字稿

Greetings and welcome to GSE Systems reports First-Quarter 2012 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Devin Sullivan, Senior Vice President of The Equity Group. Thank you, Mr. Sullivan, you may begin.

Thank you very much. Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to remind everyone that statements made during the course of this call may be considered forward-looking statements within the meaning of section 27-A of The Securities Act of 1933 as amended, and section 21-E of the Securities Act of 1934.

These statements reflect our current expectations concerning future events and results. Words such as expect and tend, believe, may, will, should, could, anticipates 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 in the 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. I'd now like to turn the call over to Jim Eberle, Chief Executive Officer of GSE Systems. Please go ahead, Jim.

Good afternoon. I'd like to welcome each of you to GSE Systems 2012 First-Quarter Financial Results Conference Call. I'm joined today by our Chief Financial Officer, Geoff Hough, and Larry Gordon, our Senior Vice President and General Counsel. This afternoon we issued a release covering our financial results for the first three months of the year. We are pleased with our performance, and are optimistic and excited about the opportunities that lie ahead.

Revenue in the first quarter of 2012 rose 8.7% to $13.4 million, from $12.3 million in the first quarter of 2011, mainly due to higher fossil simulation revenue. We continue to focus on diversifying our revenue streams. During the first quarter of 2012, approximately 61% of our revenue was generated from nuclear projects compared to 64% in the first quarter 2011 and 68% for all of last year.

Gross profit improved both on a dollar basis and as a percentage of revenue, due to lower total revenue for the Slovakia project which carries a lower gross profit percentage than our normal gross profit percentage and an increase in revenue generated in our fossil simulation business. We had a $500,000 turn around in operating income during the quarter, which reflected higher revenue and gross margin and the decline in amortization expense.

Pre-tax income rose to $800,000 from $400,000 in the first quarter of 2011. Net income for the first quarter of 2012 was $530,000 or $0.03 per share compared to a net income of $1 million or $0.05 per share in the first quarter 2011. Please recall that the first quarter 2011 includes the benefit of a reduction in the deferred tax asset valuation allowance by $1 million in conjunction with the acquisition of EnVision systems. EBITDA for the first quarter of 2012 was $900,000, compared to EBITDA of $700,000 in the first quarter of 2011.

Moving to the balance sheet, our cash balance as of March 31, 2012 was $17.2 million excluding $5.4 million of restricted cash and unrestricted certificates of deposit. This compared to cash and equivalents of $20.3 million at December 31, 2011, which excluded $6.2 million of restricted cash and unrestricted certificates of deposit.

The change in cash and cash equivalents from year-end 2011 was primarily attributable to cash flow timing, $0.3 million in treasury stock purchases of GSE common stock, and a $0.5 million investment in the GSE-UNIS joint venture. Our cash and cash equivalents as at March 31, 2012 equated to about $0.93 per diluted share. If we were to add in the $5.4 million of restricted cash and CDs, cash per diluted share would approximate $1.22. At March 31, 2012, and as of today we have $0 in long term debt.

During the first quarter of 2012, we purchased an additional 162,387 shares of common stock to bring our total share purchases under our plan to 986,761 shares. During the first quarter of 2012, we were awarded $17.8 million in new contracts that addressed multiple disciplines and end markets. Our backlog at March 31, 2012 was $56.5 million compared to $51.5 million at December 31, 2011.

At March 31, 2012, approximately $4.7 million of GSE's backlog was related to the Slovakia project. In May, 2012, the customer of our Slovakia project notified us of its decision to suspend work on their contract due to changes in the Slovakian regulation requiring us to redesign certain aspects of the plant. This decision to suspend the contract is not related to work being performed by GSE.

We are currently negotiating with the customer regarding ways the Company can continue to work together, including supporting the project during the suspension period, and other hardware and software changes that the customer would like incorporated into the final simulator.

At March 31, 2012, we have a $5.6 million outstanding invoice included in accounts receivable, $360,000 of recoverable costs and accrued profit not billed, and a $2.9 million performance bond in place to secure completion of the contract. As we announced today, subsequent to the first quarter of 2012, we received more than $5 million in new orders. The largest of which was generated by our wholly owned subsidiary GSE EnVision LLC.

Under a multi-year agreement, GSE EnVision will provide simulation and computer-based learning modules, subsidiary of a global energy services company in core fundamental operations training for control room operators, instrumentation and maintenance technicians, and process engineers in multiple refinery and ethylene plants as well as engineering centers. Other contracts included work extensions on existing projects, including additional work on two small module reactor simulators.

Before we turn things over for questions, I want to take a moment to address the global energy landscape and how GSE is positioned to benefit from global macro trends. With respect to nuclear energy, a little more than a full month after the Fukushima, some countries, most notably Germany, announced plans to extinguish the use of nuclear power. That country appears to be in the minority with respect to the integration of nuclear power as part of a multifaceted approach to clean, dependable, and safe energy practices.

Today, there are some 435 nuclear power reactors operating in 30 countries plus Taiwan. In 2010, these provided about 14% of the world's electricity. According to the World Nuclear Association, there are currently 60 power reactors under construction in 13 countries and Taiwan. Another 163 reactors on order are planned in 28 countries, most of these being Asia. 50 countries with no current nuclear power capability have announced considerations to add nuclear energy to their power generation capabilities.

In the US, the Nuclear Regulatory Commission is actively reviewing 13 combined construction operating licenses for 21 new nuclear power reactors. On February 9, 2012, the NRC approved plans to build the first two nuclear power plants in the US in more than 30 years. The new plants will use 18 1,000 reactors built by Westinghouse Electric. A standardized design approved by the NRC in December of 2011.

Each new plant will be required to have a full scope simulator ready for operator and training and certification in about two years prior to fuel load. With our leading market share, excellent reputation, and world class technology, GSE is poised to capitalize on the worldwide nuclear energy growth by providing engineering, training, and simulation solutions.

In February 2012, the NRC issued the first three new rules to deal with safety issues based on eight changes identified by its Fukushima task force, with implementation expected by the end of 2016. The rules, subject to reviewing commission action, will require all US nuclear operators to develop plans to deal with extreme situations such as earthquakes, floods, and other natural disasters that could affect multiple reactors operating at a single site.

In addition, all plants would have to improve instrumentation in the pools used to store spent nuclear fuel and have to make changes to containment bench structures at plants similar in design to the Daiichi Nuclear Plant.

In Japan, prime minister Yoshihiko Noda, stated that he is determined to restart the country's idle reactors by the summer of 2012. At December 31, 2011, GSE's Swedish subsidiary has projects in progress in Japan with a backlog of $4.6 million, none of which have been delayed or affected by Fukushima. In fact, we believe we will continue to win nuclear contracts in Japan.

In March, 2012 the state run China Daily cited the Deputy Director of the Committee of Population Resources and Environment of the CPPCC National Committee as saying that the ban on proposed new atomic energy plants that was put in place following the Fukushima disaster would soon be removed as a comprehensive plan on nuclear safety control has been submitted to the state council.

Previous nuclear accidents have resulted in new regulations requiring additional operator training, higher fidelity models and new testing scenarios. Accordingly, as evidenced by the new safety rules that the NRC has recently voted to issue and the comments in the China Daily, it is likely that additional government regulations enacted in the aftermath of Fukushima's nuclear accident will result in the requirement for plant modifications and new testing scenarios that will result in the need for higher simulator fidelity such as that designed and supplied by GSE.

In order to meet the world's needs, all forms of energy nuclear, fossil, and renewable must play a role. Published reports have stated by 2040 that electricity generation will account for more than 40% of global energy consumption. Now take into consideration that over the next five years 42% to 50% respectively of the nuclear and electric natural gas utility engineering work forces may need to be replaced.

GSE is prepared to address this looming knowledge gap. For more than three decades, we have leveraged a simulation capability that we dissolved from nuclear power for non nuclear projects. Globally, we have delivered 121,000 fossil power plant simulators and 96 process industry simulators.

This is an exciting time for GSE with a multitude of opportunities and avenues for growth before us. We believe we possess the human, capital, and the intellectual resources to address these opportunities. Continue our evolution as global energy solutions provider and expand our global presence. We appreciate your time today and now we'll be happy to take your questions. Operator, please go ahead.

Thank you. (Operator Instructions) Mark Schappel with The Benchmark Company.

Hello Jim, good evening. Starting with the Slovakian, the nuclear simulator. Could you just adjust a little bit more detail some of the issues surrounding that project and why it was put on hold?

Sure. Primarily, they had project delays on their side and what they're doing is allowing the rest of the project to catch up. What that does is it -- because of their being behind it prevents us from moving forward. However, what they've asked us to submit is options, one being complete suspension on our side and what the cost of ramping down and ramping back up at some point is, versus keeping a reduced crew on that project. So what we expect is that there will be some change order, whether it is as a result of a stop and start or a result of keeping a smaller group of people on the project for this period of time.

And I take it the suspension was relatively short order. It's been in the last week or so?

Exactly. That's exactly correct. It was in this month.

And you still have all your people on site, I take it, as well?

Currently we do, while assessing the situation. Because it will take our people to put the project in a sort of orderly shutdown condition so that then it can be brought back up in an orderly fashion.

Okay, great. And moving on a little bit, TAS Engineering, do you know what the revenue contribution was in the quarter?

Can you say that again, please?

Is that with respect to TAS engineering, can you just tell us what the revenue contribution was?

It was $1.1 million.

Okay, great, thank you. And then NuScale Power, just keep tabs on that project. Were you able to renegotiate the new contract or is that still in process?

Yes, we were. As a matter of fact, part of that $5 million in new work that we mentioned, some of that is associated with the next phase of that project.

Great. Thank you.

Thank you. (Operator Instructions) Dick Ryan from Dougherty.

Hello Jim. Say I didn't catch on the Slovakian project. How much of that is in backlog? And I think you'd mentioned receivables. Any concerns on collections there at all?

So at this point I have no concerns on receivables. The only potential impact I see at this point is that they may -- there may be some dragging out because of the delay in the project. As far as the backlog, we -- as of the end of March 31, that's $4.7 million. About $1.7 million of that is hardware.

Okay. You mentioned a $500,000 increase in the JV in China. What's currently going on there?

So that was the final tranche of paid-in capital for the JV. So that was all part of the original agreement. And what's going on is the JV is doing well. It has -- recently it's turned to profitability as far as contributing to the income statement out of the joint venture proper, but also the presence that -- the combined presence that we had in the combined marketing sales ability, as you may have seen, and I know you and I have played phone tag until this call, but the $7.4 million of new contracts, the V of E contracts in China, a lot of that can be attributed to our presence and our efforts there in China.

Is that business for AP1000s there or is it for the Chinese design?

It is Chinese design, so it's what's considered third generation passive safety Chinese design.

Okay. And the $5 million in orders subsequent to Q1, so that's not in the $56 million backlog? Do you have a sense of how that backlog should flow over the next 9 months, 12 months?

I think at this current level about 56,000 -- or, I'm sorry, $56 million, that over the next nine months or so that we'll probably be pretty consistent in that range. There's some opportunities for some big jobs to come in and make changes in that. At the same time, of course, we're burning at a higher rate than we have in the past. So, we're going to continue to build. The other thing is a lot of our growth areas are in our acquisition companies, which tend to burn their backlog faster than the traditional GSE nuclear backlog, and, as well as fossil jobs. We are are focused on increasing fossil jobs. Those tend to burn in about a 12-month period as compared to two to four years on the nuclear job.

Okay. One last one on the training side, can you provide an update there, what you're doing with either jump start or any other opportunities there?

Sure. We have two important contracts that we're executing currently, one which we had announced prior is with EPRI. So there's pilot jobs there that's 3D visualization work and that work continues and these are, as I mentioned, they're pilots. So the idea is that EPRI will take these modules, present them to their constituents and essentially for us it turns out to be market research, and then the follow-on modules will be dictated by their interest for their constituents. At the same time, we have also won some other 3D jobs with other companies doing breakers. We are also pursuing many, many opportunities in that space.

As far as full on training, actually we have won a job with a major Southeastern utility where we are delivering senior reactor operator certification training. So this is important in a couple ways. It's the deepest that GSE has ever gone in delivering nuclear training in the US, and we leveraged our VPanel technology and our generic pressurized water reactor to differentiate our proposal offering. So, whereas competing against a traditional training company, they would not be able to provide that technology in the simulator in the classroom, and that's a real differentiator.

So while dollar-wise at this point those are not hugely significant, they are sort of flags in the ground as to where we're heading. We have lots of opportunities in the international arena, and we continue to pursue those as I'm sure I've mentioned to you, I mentioned to really anybody that asks. I think probably our first large training nuclear contract will be outside the US, just because of how entrenched the US is in their current training paradigm.

Okay. Great. I'll get back in line. Thanks, Jim.

Thank you, ladies and gentlemen. There are no further requests for questions at this time. I will turn the conference back to management for closing remarks. Thank you.

Thank you. Well, I would like to thank everyone for their time and your continued interest in GSE. Additionally, I would like to thank all the GSE employees and management that worked so hard to contribute to our success. And I hope to see some of you at The Benchmark 101 Conference on May 31. We expect to participate in a number of other events in the coming months and we'll keep you posted on our activities. Thanks and have a great afternoon.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.