GSE Systems Inc (GVP) 2012 Q4 法說會逐字稿

Greetings and welcome to the GSE Systems reports fourth quarter and full year 2012 financial results. At this time all participants are in a listen only mode. A brief 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, Robin, and good afternoon, everyone. Thank you for joining us today. Before we begin, I would like to remind one 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 our 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 that 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 would now like to turn the call over to Mr. Jim Eberle, Chief Executive Officer of GSE systems. These go ahead, Jim.

Thank you, Devin. Good afternoon. I would like to welcome everyone to GSE Systems' 2012 fourth-quarter and year-end conference call. Also on today's call is our CFO, Jeff Hough, and Larry Gordon, our Senior Vice President and General Counsel. Earlier this afternoon we issued a press release covering our financial results for the fourth quarter and the full year of 2012. Hopefully you have had a chance to review our results, but if you have not had a copy of the -- the release can be found in our website at www.GSES.com under the investor relations section. Before I move forward with the quarterly review, I'd like to address our progress in 2012 and early 2013. Despite a difficult fourth quarter, we recorded our second consecutive year of profitability and revenue growth. Revenue for 2012 increased to $52.2 million from $51.1 million in 2011. Gross profit increased to $17.7 million or 33.9% of revenue from $16.3 million or 32% of revenue in 2011.

Net income was $1.2 million or $0.06 per diluted share compared to a net income of $2.8 million or $0.15 per diluted share in 2011. We continue to broaden our portfolio of simulation and training solutions with the introduction of the Virtual Flow Loop Trainer, a high fidelity simulation model that incorporates serious gaming 3-D technology and a practical cost-effective environment. 3-Di-TouchWall, an integrated software hardware solution that provides a highly immersive simulation experience similar to a virtual reality cave environment at a fraction of the cost. ControlSim, our control system design and V&V platform, designed for rapid development testing of plant control and logic strategies in human machine interface design. ControlSim provides the ability to immediately test the control or HMI screens by directly connecting to the visual instrumentation and control V&V platform.

We continue diversifying our revenue and made significant progress against our stated goal of expanding GSE's presence in the training and education industry. At year end 2012, approximately 59% of our revenue was related to the nuclear power projects, down from 68% last year and 72% in 2010. Conversely, 10% of our revenue in 2012 came from training and education, the highest in our history. We are focused on further penetrating these space in 2013 and beyond. We signed a contract with two Chinese nuclear engineering companies to apply our high fidelity simulation technologies for design and V&V of the new generation of intrinsically safe nuclear power plant designs. We resolved all open issues with our project in Slovakia and expect to have this project completed by the end of this year.

We rebranded GSE in nearly every aspect reflecting our innovative approach to applying high fidelity simulation as a premier tool for educating the next generation of energy industry professionals. We made a number of executive appointments designed to foster growth in all of our operating regions. Steven Freel will assume the role of Chief Operating Officer. Graham Wren was named Managing Director of GSE's operations in Europe. Jean-Marc Holt was appointed Senior Vice President of Global Business Development, and our President, Jerry Jen started a special assignment in Asia to focus on maximizing our Chinese joint venture GSE-UNIS. We signed an engagement agreement with investment banking firm, Valufinder Group, Incorporated to assist us in identifying potential targets for mergers and acquisitions in the US and abroad. And we took steps to right size the organization by reducing the number of engineers in our Chinese JV by 29 and reducing labor and subcontractor costs in the US by more than $1 million.

I will be back to you shortly for some closing comments, but I'd like to turn the call over to Jeff Hough, our Chief Financial Officer, who will discuss the quarter. Jeff?

Thanks, Jim, and thank you all for joining us today. Revenue declined in the fourth quarter of 2012, primarily due to $1 million reduction in revenue generated from various contracts from a German customer as compared to the same quarter in 2011, and a $1.7 million reduction in revenue generated from a contractor to provide a full scope AGR replacement simulator with a British utility. These revenue decreases were partially offset by an $800,000 increase in revenue recognized on the Company's $36 million order for a new simulator for a Slovak utility. Gross profit for the quarter was $4.3 million or 33.9% of revenue, as compared to $4.5 million or 30% of revenue in the fourth quarter of 2011. The increase in gross profit as a percentage of revenue in the fourth quarter mainly reflects the impact of the $9.1 million change order that we received in December related to the Slovak utility order which increased the overall gross margin on the project and added approximately $0.5 million of gross profit in the fourth quarter of 2012. In addition, our UK subsidiary had higher engineering services revenue in the quarter, which tends to have higher margins than our simulation business.

We recorded a $1.5 million increase in our SG&A expenses in the fourth quarter 2012 compared to 2011, and these increases mainly reflected the following items. We had an increase of about $300,000 of expenses that was associated with the implementation of our new global enterprise resource planning system. We had a $300,000 increase in our global sales and marketing initiatives, including approximately $100,000 for our biannual SimWorld users conference that was held in the fourth quarter and a loss of approximately $100,000 in the fourth quarter 2012 related to the change in the fair value of contingent consideration related to the TAS and Envision acquisitions, as this compared to a gain of $700,000 in the fourth quarter of 2011.

Also contributing to our net loss for the fourth quarter 2012 was $171,000 loss on derivative instruments and an equity loss of $265,000 on the Company's investment in the Chinese joint venture GSE UNIS which is included in other income expense. Our balance sheet remains very strong. Our cash balance, excluding $2.8 million of restricted cash and unrestricted certificates of deposit, was $22.4 million or approximately $1.22 per share as of December 31, 2012.

And now I'll turn the call back over to Jim for his closing comments.

Thank you, Jeff. We entered 2013 with zero dollars in long-term debt and working capital of $29.5 million. With the help of our bankers, we are focused on using our balance sheet to pursue strategic investments and acquisitions that will further our mission to be on the global energy service solutions provider. As we previously announced, we engaged Valufinder, an investment banking firm specializing in middle-market M&A to help us in the acquisition process. We are currently in the initial stages of the process which involves identifying, screening and prioritizing hundreds of targets.

Before we turn things over for questions, I want to stress our collective commitment to growing GSE and delivering value of our shoulders. Our mission lies at the intersection of two indisputable truths. Global energy use is rising, as is the average age of the skilled energy worker. At some point, the current workforce will retire and there is an acute shortage of skilled workers to succeed them. Simply put, the oil and gas and nuclear industries has a mission -- a missing generation. Within the next five years it is estimated that 42% of the nuclear workforce will need to be replaced while 46% of the current energy industry workforce may need to be replaced in that same timeframe.

Here's one example. Technological advances such as horizontal drilling and hydraulic fracturing have allowed the US to position itself as the world's largest gas producer and may push oil output ahead of Saudi Arabia by 2020. According to PayScale Incorporated, creator of the largest database of individual compensation profiles in the world, the energy boom is among the reasons Harvard University graduates in 2012 were out earned by those from a South Dakota School of Mines and Technology. Think about that. Training by its very nature is a spend that many companies tend to defer until they absolutely have to or they find themselves in trouble. With the energy industry -- when the energy industry recognizes this need, and we believe that recognition is coming soon, they will demand solutions that, when compared to traditional modalities, are faster, more intuitive, more impactful and better designed to teach a generation of students brought up on video games and a 140 character conversations. They will demand what GSE offers today and what we will introduce tomorrow.

We appreciate your time today, and we would now be happy to take your questions. Operator, please go ahead.

(Operator instructions)

Mark Schappel, Benchmark.

Jim, I was wondering if you could go into greater detail on the reduced revenue from the German and British customers?

Sure. The British customer, as you may recall, is just a natural evolution of the job ending. And what you may recall is that, that job, while we are missing revenue from it, it was a net negative from a profit. It was one of the jobs that I found when I first joined the Company, and then we worked diligently with the British utility to negotiate something that both parties could live with. And we are just now on the warranty period of that. So, from a troubled project, we now have what I would view a very good relationship. And, in fact, we are hopeful that we would have the opportunity to have some additional work with them. So that was just sort of the natural end of that job.

And then the German customer, as any of you who pay attention to the nuclear industry -- and I know you do, Mark -- Germany announced that they are going to retire their nuclear fleet over the next about 10 years. And KSG, which is the centralized simulation training company in Germany -- they have been a large customer of ours. They have approximately 14 simulators running in one building, and we have enjoyed a great relationship and did quite a bit of work with them on those simulators. However, with their political decision to not continue with nuclear, at least for the time being, just the sort of the natural waning of work that is required there.

Okay, thanks.

And, the ERP project and the sales and marketing initiatives that were in the higher SG&A cost this quarter -- are both of those initiatives complete? Or is there still going to be a little bit of leftover in Q1?

Yes, there is some trail, Mark. The ERP -- I would call it roughly halfway as far as the investment. So we would expect in the first half of this year, some additional costs in there. We do see it tapering off towards the end of the year, and I don't see much in the way of '14 and beyond.

And the sales and marketing -- while we as you know, we did a complete rebrand, we did the website and we had SimWorld last year. And so, while we are not going to be spending money on rebranding or those types of things, we do expect to incur some costs throughout the year for continuing public relations. So, I would see it scaling back from last year, but not to zero.

Okay, and then finally, switching gears a little bit -- I was wondering if you could address some of the market dynamics you are seeing with respect to your fossil power business and what is driving that business?

Yes, so fossil -- it is a very different story worldwide. Here in the states, you read, or at least I read all the time coal plants closing; being shifted to natural gas. So while there is certainly one lost opportunity, there is new opportunity with new gas plants, and we do aggressively bid those. China, as you may have picked up in the script -- the China fossil market is pretty depressed, which is one of the reasons we made some significant headcount reductions in our joint venture. And in Europe and Middle East and even in Africa, you do see fossil business.

And it is always competitive, because we have a very small group of competitors who get the RFPs. So, we are constantly focused on creating more value than our competitors hoping to hold margins and win more work. So it is sort of a mixed bag.

But just in general, the energy industry worldwide -- it has been tough the last few months. There is a lot of large capital projects that are being pushed to the right. So as we look at our order budget and we are forecasting, we have not seen a lot of jobs that we have just out and out lost or that were canceled; it just -- they're tend to be pushing to the right. So you also heard in the script that we reduced labor and subcontractor costs here in the US by over $1 million as well -- on an annualized basis that is.

Okay, thank you.

(Operator instructions)

[Jay Gottlieb], private investor.

I am a private investor and have a decent stake in the GVP. And I just noticed that a lot -- all of your presentations have been to the trade groups, and very little in the way to the financial community; and very disheartened with your public relations firm. I have dealt with them for many years and have never seen anything on GVP out in the public domain. Cannot even get, other than the presentation online, there is like nothing out there. I would like to know how you plan on addressing that in the future?

Well, next week I'll be at the ROTH Conference, the 25th ROTH Conference. I had actually had scheduled another investor conference, but it was just prior to our earnings release, and just schedule-wise and with the earnings coming out this week and that conference being last week, it just did not seem prudent to go out and -- ahead of the earnings. And we do have actually a full schedule that work with the Equity Group, our IR firm, and we have got the whole year planned out. It does tend to slow down at the year end, but it usually picks up right about now, actually, and then quite busy through summer.

So I hope to change your mind on that, and I'm looking forward to getting out and getting up to these conferences and some non-deal road shows.

Okay, I appreciate the answer. One puzzling question as to the future of, let's say in lateral drilling and fracking, is there any chance that you guys would get involved in training for those particular industries?

It is certainly possible. The solutions or the areas that we feel that our products and services would line up best is initially with wastewater. Our products and services tend to be the right answer for high-risk or regulated businesses, and so we see the wastewater as a possibility. However, to date, we have not actually closed a job on that. But we, like everyone, is focused in that area and trying to find a foot in the door.

Okay, I appreciate it. Thank you.

There are no further questions at this time. I would like to turn the floor back over to Management for closing comments.

Once again, I would like to thank the hard-working women and men at GSE for all their effort and support, and thank you for your time and continued interest in GSE Systems. We hope to see some of you at the 25th Annual ROTH Conference next week in Dana Point. Will be presenting on Wednesday, March 20, at 10.30 in the morning. Thanks and have a great afternoon.

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