GSE Systems, Inc.
Q3 2020 Earnings Call Transcript

Published: 16 Nov 2020

[Operator:]

Hello and welcome to the GSE Solutions Third Quarter 2020 Financial Results Conference Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to, Kalle Ahl with The Equity Group. Please go ahead.

[Kalle Ahl:]

Thank you, Kevin, 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.

[Kyle Loudermilk:]

Thank you, Kalle. I'd like to welcome everyone to GSE's third quarter 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 third quarter 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. In the third quarter, our industry continued faced curtailed bidding activity, delayed contract awards and project pauses due to the COVID-19 pandemic. We recorded third quarter revenue $12.9 million and adjusted EBITDA of negative $600,000 both of which were below respective prior year comparable figures and well below the normalized potential of our business. In this challenging environment, we remain sharply focused on cost containment and debt repayment while staying in front of our customers through a hybrid virtual and in person selling approach positioning us for success when industry activities rebounds. After repaying nearly $10 million of long-term debt during the quarter our cash and equivalents totaled $7.7 million at September 30th providing a sufficient financial flexibility to manage the business. Moreover our business has the capacity to generate strong cash flow and even during this unprecedented first nine months of 2020 we generated positive cash flow with our cash provided by operations totaling $1.6 million while we can't predict with precision or certainty the near-term impact of the pandemic, our long-term outlook is positive. We provide essential high value services to the nuclear power industry which plays a critical role in the global decarbonization of energy.

[Emmett Pepe:]

Thank you, Kyle. Total revenue in Q3, 2020 was $12.9 million compared to $20 million in Q3, 2019 reflecting a $4.2 million decrease in our performance improvement segment revenue and a $2.9 million decrease in our NITC segment revenue. A decrease in performance improvement revenue was driven primarily by COVID-19 related headwinds, 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. Gross profit in Q3, 2020 totaled $3.3 million compared to $4.7 million in Q3, 2019. Performance improvement gross profit declined by approximately $1.1 million to $2.5 million. NITC gross profit decreased by approximately $288,000 year-over-year to $837,000. The decreases in gross profit for each segment were in line with our revenue declines. We continue to manage our cost structure during the pandemic to maintain our margin percentages. In fact, our gross profit margin percentages are up in both segments quarter-over-quarter and year-to-date to year-to-date. SG&A expenses totaled $2.9 million in Q3, 2020 versus the comparable figure of $3.5 million in Q3, 2019. The decrease in SG&A expenses were driven by $952,000 cash settlement received from an escrow account for our purchase agreement with Absolute Consulting. Excluding this provision, SG&A expenses remained relatively stable on a year-over-year basis reflecting our emphasis on cost containment. Operating loss equaled approximately $371,000 in Q3, 2020 compared to an operating loss of approximately $365,000 in Q3, 2019. Non-GAAP adjusted EBITDA loss as defined in our earnings release totaled approximately negative $600,000 in Q3, 2020 compared to a positive adjusted EBITDA of $1.4 million in Q3, 2019. During the first nine months of 2020, we paid down $18.5 million of our long-term debt. In August, we successfully amended our credit agreement with Citizens Bank and during Q3, 2020 paid off the term loan used for the acquisitions of DP Engineering and True North Consulting.

[Kyle Loudermilk:]

Thanks Emmett. Operator, please open the floor for questions.

[Operator:]

our first question is coming from Tim Chatard from Meros Investments. Your line is now live.

[Tim Chatard:]

Just related to gross margins both segments up year-on-year and through the course of the year actually both segments trending quite strong relative to the lower revenue. If you had a recovery in revenue in future quarters, would you expect gross margin to revert back for any reason or are the current levels indicative of what you can keep gross margin or potentially any other color there?

[Kyle Loudermilk:]

Yes, this is Kyle. I'll take that Tim and Emmett if you have further color or thoughts, feel free to add on. Tim, it's a good question and it really does in the time of the pandemic while it's been challenging to shed some business and see some business delayed. It does shine light on the fact that in or core businesses gross margins could be quite good and that's what we're seeing right now and that's helping us ride out this pandemic. It does show the ability that when business does come flowing back to help us focus on operating lean and mean in keeping that cadence to keep those gross margins as high as possible. With that said, some of these projects that have been delayed, have been lower margin than what you're seeing in our core businesses right now. But there may be an opportunity to - the margins based on altering we found during this pandemic that we alluded to in the call. Emmett, do you have any further color?

[Emmett Pepe:]

Yes, the only thing I would add you kind of touched upon at the end. The mix is always going to come into play and NITC business is lower margin than the performance segment. So depending on the revenue that's generated by segment, that will impact margin and the different customers and projects - the cost point, we believe we have strong margins overall with this business and we're maintaining that as we go through the pandemic.

[Tim Chatard:]

Okay, you also mentioned I think specifically related to the NITC segment. Industries outside of nuclear that you were pursuing, if I understood that correctly. I didn't catch the industries that you were potentially focused on. But maybe you could I think I caught alternative energy. But there were some others that were listed there, is that a maybe you can flesh that out a little bit and give us some color as to where you might be able to take that business outside of nuclear?

[Kyle Loudermilk:]

Yes, the ability to provide staffing services is really an opportunity cross vertical and so what we're seeing with the addition of Brian coming and with some of these other investments and sales folks, is that we've been able to crack open and to some other verticals in broader manufacturing. One in particular was automotive, very strong need for engineering talent in the automotive sector with one of the folks that we added over the course of last year. We've seen a nice add in services there as we've alluded in the past, we have seen a temporal add that - for the medical industry in California as they were working through the pandemic as transition to our permanent step up for that instance. But we're really focused on the energy sector particularly nuclear. But we do find where we can be profitable, we do find opportunities in broader manufacturing which has really helped us with infrastructure.

[Tim Chatard:]

Okay, so that sounds like it's more opportunistic as opposed to a bona fide strategic vector to try to penetrate new industries, is that the right way to think about it?

[Kyle Loudermilk:]

No not really. We hire these folks that I alluded to and you can see in the past earnings conference calls. Where we really intentionally hire folks beyond nuclear to target segments, not where we - team success are in the segments that I mentioned. So it's a result of strategic investment where we've been successful, we've continued with that investment and that's where you see the results we discussed. If we're not successful then we cut our losses and make sure that we are ready to bounce, if the market turns.

[Tim Chatard:]

Okay and I've got a couple more questions. I don't want to dominate the discussion if there's a - if it's best for me to go back in the queue. But what's your guidance there?

[Kyle Loudermilk:]

Tim, I would say just maybe one or two more questions and then we'll check on the queue.

[Tim Chatard:]

Yes. You mentioned the concept of simulation work maybe being delivered virtually. I'm curious about that if that's something that it was sort of COVID phenomenon or whether that's been something you've been working on for longer periods of time and what potentially that might do to enhance your business going forward, if delivering a virtual simulation is - would the revenue scope remain the same, would the margin structure changed all? I'm just curious to hear more about that.

[Kyle Loudermilk:]

Yes, I'll walk you through an example of used cases with a particular customer that's working with us to deliver simulation solution and training solution for their particular utility plan. Traditionally utility sectors very traditional and you know doesn't adopt quickly to change for good reasons, really risk management you're dealing with power plants, as long as they work and operate safely. Not necessarily motivated to change and that's pervasive in how projects are approached. What we've seen during a pandemic while we put the investment and infrastructure in place to deliver this technology and work virtually with customers. This infrastructure has been in place really for some time now because we've made the prudent investments to try to lower the amount of T&E in our projects to use margins and be more efficient, more accurate with customers. So adoption of that, on the customer side hasn't been as rapid as we wanted. But they were moving along and which was a good sign. For what we've seen with the pandemic is there is no travel unless it's absolutely essential and we do have the need to go to client sites and sometimes client come to us. But with the pandemic, there really was an opportunity silver lining was to really leverage this technology, educate the customers that we don't need to travel to you as often, you don't need to travel to us as often. We can work virtually as teams using collaborative technology such as Zoom, such as using - being able to drop files directly at the client servers and vice versa in a secure manner with firewalls and VPNs. And be able to work collaboratively for a broader scope virtually than we have been in the past, that's made us more efficient, more accurate unless wear and tear with travel because we're saving the money on T&E that can induce margins marginally. But we don't see a reduction in the overall budgets for these projects. The work has to get done. We're just doing it more efficiently now and that also explains somewhat of the margin you say, we've been seeing.

[Tim Chatard:]

Great, I understand. I appreciate it. That's all from me. Thanks.

[Kyle Loudermilk:]

Okay, thanks very much and good questions. Kevin, any more questions in the queue?

[Operator:]

Not at this time, sir. I'll turn the floor back over to you for any further or closing comments.

[Kyle Loudermilk:]

Great, thanks Kevin. I'd like to thank everyone for joining us. It was a good discussion. We appreciate your time and interest in GSE. Well we won't be on the road for investor conferences in the near term given that pandemic. We remain accessible for one-on-one calls. We've had a number of good calls over these past few months and we certainly look forward to more. So wanted to emphasize that. Please reach out to our IR firm, Kalle Ahl in The Equity Group. If you're interested in scheduling a follow-up call. We'll be delighted to speak with you. Once again, I'd like to thank everybody for joining today's call with us.

[Operator:]

Thank you that does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.