GSE Systems Inc (GVP) 2013 Q1 法說會逐字稿

Greetings, and welcome to the GSE Systems reports First-Quarter 2013 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, Mr. Devin Sullivan, Senior Vice President of The Equity Group. Thank you, Mr. Sullivan. You may begin.

Thank you Manny, 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 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 Mr. Jim Eberle, Chief Executive Officer of GSE Systems. Please go ahead, Jim.

Thank you, Devin. Good afternoon. I'd like to welcome everyone to GSE Systems' 2013 First-Quarter 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 quarterly financial results, a copy of which can be found on our website at www.GSES.com under the Investor Relations section.

Our results for the first quarter were disappointing. Lower revenues combined with continuing investments in our people and infrastructure costs produced a loss for the quarter. We expect to begin realizing the benefits of these investments in 2014 and beyond. We believe that much of the top-line sluggishness is being driven by delays in the awarding of contracts, mainly contracts which we expected to be awarded in Q1 are now being pushed to the second half of 2013. I want to stress that these are delays in awarding of contracts not cancellations. Because we expect these projects to close later this year, we will incur certain overhead expenses and likely suffer from the effects of underutilization until these projects ramp up.

I am pleased with our bid and proposal activity. We are seeing interest in our suite of solutions from various geographies, including Asia, Europe, the Middle East, Africa, North and South America; and end markets including fossil, nuclear, oil/gas, and petrochemical. We also have several, what I'll refer to as game-changing contract opportunities in the areas of large simulation-based training centers.

We had a number of exciting developments occur during the quarter. We announced that we will supply our active 3-Di visualization technology to a state-of-the-art training facility being constructed by EDF Energy in a 900-year-old medieval monastery in southwest England. We upgraded our JADE modeling tool set and our ISIS database system, making our software more attractive, intuitive, and robust.

In April, our experts spoke at or chaired three significant conferences. Our Senior Vice President of Workforce Solutions, Phil Polefone, presented blended, engaging training for new nuclear workers at the Second Annual Summit of the Regional Center for Nuclear Education and Training at Indian River State College in Fort Pierce, Florida. Our 3-D visualization technology expert, [Mike Laird] hosted a panel discussion titled Virtual Worlds for the Energy Industry at the 2013 Defense Game Tech Users Conference to address how virtual worlds are being used to improve training and operational effectiveness across the energy industry.

Our Vice President and head of our GSE EnVision product line, Santosh Joshi, was the Honorary Chairman and Moderator for day two of the 7th Annual China Petrochemical Focus Conference in Shanghai, which focused on technology and operational excellence. In May, two of our simulation technology experts gave a joint demonstration titled Delayed Coker and FCC Simulations in CBTs, at the Annual Coking and Cat-Cracking Safety Seminar in Galveston, Texas.

Our continued diversification strategy is especially relevant in a time of increasing interest in developing domestic oil and natural gas reserves. Statistics show that US universities are producing only about 20% of the engineering graduates they did 20 years ago. The petroleum industry needs to train its recruits better and faster on systems that are more complex than ever before. They also need to make sure that they retain those recruits over the long term.

New innovations and simulation-based training, such as those offered by GSE, will allow industry trainers to accomplish these goals in less time with lower costs. This includes products from GSE EnVision, which provide interactive multimedia tutorials and simulation models primary to the petrochemical and oil and gas refining industries. GSE EnVision has completed more than 800 installations in 35 countries. This quarter we continued working on several advancements related to the GSE EnVision suite of products, which include gas/oil separation process, and an upstream aiming treatment unit, adding to our robust library.

Our M&A activities continue in earnest, and we are reviewing a number of possible acquisition opportunities in the US and abroad.

I'll now turn the call over to Jeff for a review of Q1 results. Jeff?

Thanks, Jim, and thanks to each of you for joining us today.

Revenue for the first quarter was $12.4 million, a decrease of 7.5% from $13.4 million in the first quarter of 2012. The decline in revenue was mainly due to the following factors. In the first quarter of 2013, we had reductions in revenue from both Japanese and German customers, two traditionally strong sources of revenue for the Company. As an aftermath to the Fukushima earthquake and tsunami, which occurred over two years ago, the Japanese have shut down all but two of their nuclear reactors, and the Germans have announced plans to shut down all of their nuclear reactors by 2022.

For the three months ended March 31, 2013, revenue decreased $1.4 million and $700,000 from nuclear simulation customers in Japan and Germany, respectively, as compared to the same period in the prior year. Furthermore, fossil fuel simulation revenue decreased $800,000 in the first quarter of 2013, as compared to the prior year. In the US we have seen a delay in capital spending by the utilities, due to uncertainty regarding environmental regulations that are due to go into effect in 2015; and the low price of natural gas and the likelihood of abundant sources through the fracking processes. The revenue decreases were partially offset by a $1.8 million increase in revenue recognized on the Company's $36 million order for a new simulator for a Slovak utility. We expect that this project will wind down by the end of 2013.

Gross profit for the quarter was $3.1 million, or 24.9% of revenue, as compared to $3.9 million, or 29.3% of revenue, in the first quarter of 2012. A higher percentage of Slovakian revenues, 23% of total revenue in the first quarter 2013, versus only 8% in the first quarter of 2012, and lower high-margin core business revenue margins led to this decline.

General and administrative expenses for the first quarter of 2013 was $4.2 million, an increase of 19.5% from $3.5 million in the first quarter 2012. This increase is primarily due to about $185,000 of maintenance of support costs related to the Company's new enterprise resource planning system that was implemented in the third quarter of 2012. We expect these costs to continue throughout 2013, although reducing in the last half of the year as the familiarity with the systems processes increases.

We incurred approximately $200,000 of costs in the first quarter 2013, associated with the new larger GSE UK office, which was occupied in December 2012, and an increase in the allocation of GSE UK's Management expenses to G&A in 2013; and due to foreign currency translation losses. We recorded a net loss of $1.2 million, or $0.06 per diluted share, in Q1 2013, compared to a net income of $530,000, or $0.03 per diluted share, in last year's first quarter.

Our balance sheet remains very strong. Our cash balance, excluding $2.6 million of restricted cash and unrestricted certificates of deposit, was $18.7 million, or $1.02 per share, at March 31, 2013. During the first quarter 2013, the Company made earn-out payments totaling $979,000 to the former EnVision shareholders. In addition, due to the timing of milestone payments made to the DCS vendor on the Company's Slovakian simulator project, versus cash receipts from the customer, the Company's cash balance decreased by a net $980,000 in the first quarter of 2013. At the end of the quarter, we had no long-term debt, and working capital of $28.2 million.

I'll now turn back things over to Jim.

Thanks, Jeff.

Before we turn things over for questions, I want to stress our Management's continuing commitment to growing GSE and enhancing long-term value for our shareholders. We believe that we are on the correct path, and that better days lie ahead. We appreciate your time today, and would now be happy to take your questions. Operator, please go ahead.

Thank you.

(Operator Instructions)

Mark Schappel, Benchmark.

Jim, starting with you on the expense levels, is this the new normal going forward here?

I wouldn't exactly call it a new normal. I would say for this year, there were -- there was about, almost $1 million in there that was an earn-out payment. So that doesn't happen every quarter. You back that out, we do have some potential future earn-outs based on the performance of the acquired companies. But I expect that by the end of 2013, that's when we would be able to go backwards on some of the expense levels we have.

As I've been mentioning for some time, investments that we've made obviously in our IT infrastructure, implementing Oracle; we're also implementing project management tools, techniques, training. We implemented an enterprise-wide customer relationship management software. We're in -- been investing in internal trainings. There's some catch-up investments we needed to make last year and this year, and I would expect 2014 is one when we would really start to realize the benefits of those investments, but also when we wouldn't have to make them at that level.

On the gross margin front, do you see that returning back to the low 30%s range any time soon?

This year is going to be difficult because of that huge slug of Slovakian revenue that we have. As you may recall, we booked a very large change order in the fourth quarter. We have about $11 million total of revenue that we are going to generate from that project this year. Approximately $5 million of that is equipment, Jeff? Yes. So it's in, and with the orders being off, what we're facing this quarter as well as last quarter is orders that we had expected to be in and have not come off the table. They're still out there and we expect to win our fair share. We're missing on the other revenue streams, which would lift the gross margin percentage. Until we are able to book those orders and start executing them, that project is going to weigh on our gross margin line. However, on the flip side, that project completes this year. Right now, we don't see any other large orders with large amounts of equipment in them in our backlog or in our orders forecast.

Okay, great. I was surprised to see the decline in your fossil simulation business. That had been a focus of the Company over the last year-plus here. Could you talk about that a little more?

Sure. It is a focus, and we continue to focus internally on it through our public relations work, as well as our people and their time. Quite honestly, some of the jobs, there was a real lull in activity. We have seen bid and proposal activity pick up in that space. There is, as you may have heard some of the things Jeff was mentioning, and I'm sure you keep track of is -- one obviously, and if you look at the US and it's very different, it's a very regional situation when you're dealing with any of our segments, but in the US, we have no clear energy policy. Coal is essentially on hold, and a lot of the projects as they were either switching from coal to natural gas or deciding to go natural to gas, there had been a lull in activity. We do see, as I mentioned, some of that activity picking up.

In other parts of the world, what we see is pressure from the global economic condition. Large capital jobs are not -- they're certainly not accelerating. They tend to push off in these kind of times. You have recession in Europe. We have very modest growth here in the US, and -- which weighs on China. So the three largest-target continent markets for us, there's a softening in the economy, so energy demand is not up as predicted in a short-term. But as I mentioned, we believe it's inevitable in the long-term basis, so our core operating thesis, we believe, remains sound. We are just in a soft patch.

Okay, great. Finally, what was the nuclear, non-nuclear revenue mix in the quarter?

Jeff, do you have that?

Yes, it was 63% nuclear revenue for the first quarter.

So it creeped up a little, Mark, and a lot of that you can attribute to that larger chunk of the Slovakian revenue in the first quarter.

Okay, thank you.

Thank you.

(Operator Instructions)

Gentlemen, it appears we have no further questions at this time. Any additional comments?

Yes. Thank all of you again for your time, continuing interest in GSE Systems. I'd also like to thank all of the hard-working women and men in GSE that work hard for us every day. We hope to see some of you at the Second Annual Marcum MicroCap Conference in New York. We will be presenting on Thursday, May 30, at 10 AM.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.