Devin Sullivan - Kyle Loudermilk - CEO Chris Sorrells - COO Emmett Pepe - CFO

Greetings and welcome to the GSE Systems First Quarter 2018 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Devin Sullivan. Thank you. You may begin.

Thank you, Matt, 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 U.S. 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. On this call, management may refer to EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS, which are not measures of financial performance under Generally Accepted Accounting Principles, or GAAP. Management believes that these non-GAAP figures, in addition to other GAAP measures, provide meaningful supplemental information regarding the company's operational performance. Management uses these non-GAAP measures to evaluate the performance of GSE's businesses and to make certain operating decisions such as budgeting, planning, employee compensation and resource allocation. This information facilitates management's internal comparisons to GSE's historical operating results, as well as for the operating results of its competitors. Since management finds these measures useful, GSE believes that investors may benefit by evaluating both non-GAAP and GAAP results. Investors should recognize that these non-GAAP figures might not be comparable to similarly titled measures of other companies. These measures should be considered in addition to, and not as a substitute for or superior to any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP measures to their most comparable GAAP measures in accordance with SEC Regulation G can be found in the company's earnings release. With that said, I'd now like to turn the call over to Mr. Kyle Loudermilk, Chief Executive Officer of GSE Systems. Kyle, please go ahead.

Thanks, Devin, and good afternoon. I'd like to welcome everybody to GSE Systems first quarter 2018 results conference call. Also on today's call are Chris Sorrells, our Chief Operating Officer; and Emmett Pepe, our Chief Financial Officer. Earlier today, we issued a press release covering GSE’s first quarter 2018 financial results. Hopefully, you'll had a chance to review this news release, but if you have not, a copy can be found on our website at www.gses.com under the News section. Before I touch on GSE's first quarter financial highlights, I’d like to share my thoughts on our exciting acquisition of True North Consulting which we announced yesterday. In True North we acquired a highly regarded provider of specialty engineering solutions to the nuclear power industry. Since its founding in 1999, True North has developed expertise in areas such as in-service testing for engineering programs with an emphasis on ASME OM code, balance of plant programs, thermal performance, in-service inspection for specialty engineering including ASME Section XI, and software solutions. We believe True North is a tremendous strategic fit with GSE. This adjusted earnings accretive acquisition broadens our engineering services portfolio, expands our relationships with several of the largest nuclear energy providers in the United States, and adds a highly specialized complimentary talent pool to our employee base. The purchase of True North comes on the heels of our acquisition of Absolute Consulting less than 8 months ago and represents another key milestone in our strategy to leverage GSE as a compelling platform for consolidating a fragmented vendor ecosystem for nuclear power. True North also advances our progress towards the company's vision 2020 objectives which imply annual adjusted EBITDA potential between 20 million and 30 million within three years. Chris will provide some additional color on the True North transaction and other M&A opportunities a bit later. But let me reiterate that we're really delighted with this deal and expect more like to follow. Given the current pipeline, we remain confident we can maintain an appropriate cadence of acquisitions to help us achieve our vision 2020 goals. Moving on to our first quarter 2018 financial highlights. For Q1 2018 our revenue and gross profit increased 40% and 19% respectively year-over-year. We produced a strong quarterly order totaled $24.7 million which is 25% increase over Q1 2017. Our quarter end backlog remained strong at $72.4 million compared to $71.4 million at the end of 2017. Total backlog consisted of $41.5 million of performance improvement solutions and $30.9 million of nuclear industry training and consulting. While these results were solid, we did experience slower adjusted EBITDA than we expected. Emmett will provide more color in his section. Net, net we do believe we've addressed a number of one-time issues and we expect to see better results over the next two quarters. Among our orders this quarter, a large EPC company or a GSE's subcontract for the continuation of support services to two prominent U.S. government engineering laboratories dedicated to supporting U.S. Navy's nuclear program. This is the continuation of a long-standing customer relationship that goes back more than 15 years. Under the subcontract, GSE will continue to provide simulation and test specialists, as well as build and test trading devices used across a variety of government locations. The contract commenced on February 1 and adds approximately 4 million to our backlog. Assuming continuation of another four optional years, the contract could have a total value of approximately $19 million, the remainder of which is not included in our backlog. In addition, we announced today two orders for projects in China worth approximately 4 million. These are yet additional significant wins for GSE from a country that is investing heavily in nuclear power. These two deals closed in our Q2 and therefore are not reflected in our Q1 results. In conclusion, we're focusing on growing our revenue and EBITDA in 2018 by executing operationally on our backlog, driving sales and effectuating our corporate development strategy. Our whole team is fired up over - our start to the year and we’re optimistic for healthy growth in 2018. I'll now turn the call over to Chris Sorrells, our COO. Chris, please go ahead.

Thanks Kyle. I’ll begin with some additional comments on True North. We are very excited to add True North to GSE's platform. True North is a well-respected well-run specialty engineering company with high EBITDA margins of approximately 20% with a high conversion rate of EBITDA to free cash flow given the low CapEx requirements of its business. We expect True North to be immediately accretive to GSE's adjusted diluted earnings per share and anticipate it will add approximately $2 million to our annual adjusted EBITDA after identified synergies are implemented. It would also add approximately $4 million to our backlog. We purchase True North for $9.75 million in cash and an attractive price for a company with high barriers to entry due to the complex nature of its technical work. We paid $8.29 million at close and we hold difference approximately $1.5 million in escrow for indemnity and leadership retention purposes. Regarding leadership retention, we are fortunate that True North's founder and former owner Don Horn has agreed to stay with the business and will continue running it mostly as is but with some integration with our back office and coordination with our business development team. Don is well-known in the industry with a proven track record that spends two decades. He has gained the confidence of several of the country's largest utilities which have designated True North as their specialty engineer of choice for their fleets. True North's customer base is approximately 85% nuclear and 15% fossil and it's largest customer only accounts for approximately 20% of its revenue which is very low for a typical new services company. We are keeping the True North name given its brand recognition within the industry. With each acquisition the plan is to brand each with a GSE company mark beneath each logo. So in this instance we are talking about True North, a GSE company. We expect to see the financial impact from True North beginning in the second quarter as the acquisition closed on May 11. It will be part of our performance improvement solutions segment. Prior to the transaction close, we prepared a detailed 100 day plan to integrate True North with GSE. We will move swiftly to ensure that True North is fully integrated by the third quarter. True North fits well with our stated M&A goals and our pro forma LTM revenue and adjusted EBITDA now exceed 100 million and 7.5 million respectively. Stepping back and putting our external growth progress into perspective, I'd like to point out that in the last eight months through the strategic acquisitions of Absolute Consulting and True North we have added 40 million to 50 million in annual revenue and 3.5 million to 4 million plus in annual adjusted EBITDA to GSE's business. That’s significant. We purchased both company's with cash and at attractive prices. LTM adjusted EBITDA multiples of 4 to 5 provide a good margin of safety plus opportunity for meaningful accretion. We are very pleased with these deals. Even after the purchase of Absolute and True North, our balance sheet remains strong at approximately 12 million in cash. Our strong liquidity position positions us well to pursue and execute on the pipeline of deals currently under evaluation. Our M&A efforts continue to advance favorably and we remain on track to hopefully close at least one more deal this year. As we consummate additional deals like True North, we envision an uptick in our own valuations as investors realize that we are capitalizing our reoccurring value creation opportunity. Our four target areas remain unchanged, technical engineering, staffing consulting, software solutions, and value-added components. As always we will remain very focused on our publicly stated criteria for M&A to ensure that each transaction provides our investors with asymmetrical risk reward, attractive IRR and an ROIC that exceeds our cost of capital. Let me conclude briefly touching on some recent industry news. In a positive development for the industry in April, New Jersey lawmakers approved bills that provide an estimated 300 million in annual subsidies to keep PSEG, Salem and Hope Creek nuclear plant open aiming to bolster the states renewable electricity standard by limiting greenhouse gases. In April, New Hampshire also issued a paradigm shift in its energy strategy recommending that the state's renewable portfolio standard includes zero carbon emission resources such as NextEra's Seabrook Nuclear Plant. Nuclear power generated more than half of New Hampshire's energy in 2016 and preserving Seabrook, the state's only nuclear plant as an optimal way to manage emissions. Minnesota, Ohio and Pennsylvania State Legislatures also continue to draft legislation that would provide support to nuclear plants facing premature closure. We continue to see evidence that states are increasingly recognizing the value of nuclear as a safe source of carbon free reliable baseload electricity. With that, I’d like to turn it over to Emmett who will review the first quarter financial results.

Thank you, Chris. I will begin with a review of new business. Our Performance Improvement Solutions segment bookings totaled $5.9 million in Q1 2018, compared to $4.9 million in Q1 2017. The increase in Performance Solutions orders is a result of the large contract to provide support services to two prominent U.S. government engineering laboratories that Kyle detailed previously. Nuclear Industry Training and Consulting orders totaled $18.8 million in Q1, 2018 compared to $14.9 million in Q1, 2017. Absolute Consulting included $9.7 million of orders in Q1, 2018. Our strong order performance in this segment is the result of our continued work at two significant customers. Now on to review of our financial results for the quarter. Total revenue in Q1, 2018 increased 40.1% to $22.9 million from $16.3 million in Q1, 2017. Nuclear Industry Training and Consulting revenue rose 95% to $13 million in Q1, 2018 from $6.7 million in Q1, 2017 reflecting a full quarter of revenues from Absolute Consulting. Performance Improvement Solutions revenue in Q1, 2018 increased 2% to $9.9 million from $9.7 million in Q1, 2017. Our modest year-over-year increase in Performance Improvement Solutions segment is lower than expected partly driven by modest delays from a key vendor in one of our large projects. We believe to be favorably resolved and we should see better results over the next two quarters. These delays resulting in - us delaying recognition of approximately $2.5 million of revenue and more importantly the associated profit. Gross profit in Q1, 2018 increased 18.8% to $4.9 million or 21.4% of revenue from $4.1 million or 25.2% of revenue in Q1 2017. For the Nuclear Industry Training and Consulting segment, the Q1 2018 gross profit increased 33% to 1.6 million from 1.1 million in Q1, 2017. Absolute Consulting contributed 800,000 to the gross profit for Nuclear Industry Training and Consulting segment in Q1, 2018. The Performance Improvements segments Q1 2018 gross profit increased 7% to $3.3 million from $3 million in Q1, 2017. SG&A expenses in Q1, 2018 totaled $4.5 million or 19.8% of revenue compared to $3.6 million or 22% of revenue in Q1, 2017. The percentage decrease begins to demonstrate the effects of operating leverage as we scale the business. The increase in SG&A expense resulted from the acquisition of Absolute Consulting which contributed 500,000 to Q1, 2018 SG&A expenses. In addition, we incurred largely one-time higher professional fees of approximately 300,000 as a result of our year-end work related to the release of our valuation allowance, tax reform and the new revenue accounting standard which impacted our adjusted EBITDA given we chose not to add backup to those fees. Net loss in Q1 2018 was approximately $1.5 million or $0.08 per basic and diluted share compared to 300,000 net loss or $0.01 per basic and diluted share in Q1 of 2017. The loss in Q1 of 2018 is largely result of our ongoing international restructuring effort which contributed 900,000 of expense in Q1 2018 and higher tax provisions due to accruals related to uncertain tax positions for certain form tax contingencies. We are eager to realize a positive financial effects of our restructuring efforts which are planned to be largely completed by the end of Q2 2018. Non-GAAP adjusted EBITDA as defined in our earnings release was approximately 800,000 in Q1 2018 compared to approximately $1.1 million in Q1 2017. The decrease is largely due to the two items previously mentioned the delay in revenue recognition for one of our larger projects which resulted in an approximate delay of 400,000 of EBITDA and the increase largely one-time professional fees. Our cash position at March 31, 2018 totaled $12.4 million compared to $20.1 million at December 31, 2017. As mentioned previously, the delays in one of our larger projects caused temporarily decline in cash as of March 31. As these projects reached completion over the next two quarters, we expect our cash position to return to normal operating levels of approximately 50 million of cash excluding any new uses of cash such as acquisitions by the end of the year. As Chris noted on May 11, 2018 we entered into an Amended and Restated Credit Agreement with Citizens Bank consisted of a five-year 5 million revolving line of credit and a five-year 25 million delayed draw term loan facility to fund acquisitions approved by Citizens. We drew down approximately 10 million to fund the acquisition of True North at close. Interest as floating rates based on LIBOR plus applicable margin between 200 to 275 basis points which depends on leverage thresholds specified in the agreement. The fact that GSE can do this demonstrates how far GSE has come in the past few years since management initiated the turnaround in growth strategy. I’ll now turn the conversation back to Kyle.

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

[Operator Instructions] Our first question is from [Lawrence Kaplan] from LK Management. Please go ahead.

Congratulations on the quarter and on the True North acquisition. Just a question on the True North acquisition, is True North a growing company, I mean is it, just a stable company that does a couple million of EBITDA and $10 million of sales. What should we expect in the future with True North?

Yes, it’s a company I mean if you think of nuc and that’s U.S. domestic nuc, it generally grows it’s a GDP like industry. So couple of percent to four or five, here is what you might typically see. True North has done a little better than that over the past couple of years mostly driven by these two new opportunities say in the past two years in which they were entrusted as I said in my comment to become the specialty engineer of choice for two pretty prominent nuc players. So that that really picked it up call it over the past two or three years. When we talk about things Larry, you kind of know us, we tend to prefer to under-promise, over deliver. So we're looking at the transaction is what we bought, what we get if that is the case, we should be happy, anything that accrues on the upside is gravy.

Also the EBITDA is very confusing to say the least - what do you expect with the timing issues with revenue course that are affecting the EBITDA shortfall and what do we expect for the balance of the year. There is somewhere this will get adjusted out and we get more - I just think the story is confusing right now and I think that's part of the problem why people don't appreciate the acquisition and what you're growing. And I'm just wondering how you feel about this and what are you going to do to really get the story out there and get new people involved in the company?

I’ll take it from a high level maybe Chris, Emmett you can follow-up. A breakdown and Larry I’ll impact the question on the first side, the EBITDA shift out of the profit of these two large projects we were mentioning that's not money loss, that's not an opportunity loss that’s just a timing issue. So we expect to fully get that so a little bit of chop and when that comes in based on project milestones and other items that we highlighted in the call. Second part of the question is, we’re really excited by our story here of being able to leverage GSE as a platform to pull need highly specialized nuc services technology and related entities on to our platform. It’s a highly concentrated market, high nucs to serve that market not any new player can pop out of the woodwork and serve nuclear. And I have seen the movie before with a highly concentrated industry base with a highly fragmented ecosystem of vendors. It’s a very compelling opportunity ahead of us and we see that playing out between absolute True North and are excited by our pipeline. So we feel if we do the right things, execute on our strategy, operate the business, get the story out through investor conferences that you know look those are the things in our control that we can do. Chris any other further comments.

I guess the clarification we had the two things Emmett did a nice job explaining Larry. We delivered 800,000, we lost 300 to truly kind of one-time items with the professional fees. You’re probably aware of the new revenue standard 606, I mean that was a very involved and expense process. You don't see that every year that cost money to adhere to, equally important and this is really a generational thing The Tax Cuts and Jobs Act and there was tremendous work that had to go into the deferred tax assets and things that you saw in the fourth quarter and some of that continued into the first. We went from a 35% effective tax rate corporate to 21, I mean not a bad thing, but there is money in the impacts of that. So that was about 300,000 right there to EBITDA. And then with the projects getting pushed and that was - there were multiple reasons but largely supplier driven mean they went 400,000-ish of EBITDA. So now you're talking a $1.5 million a quarter versus a 1.1 million and that would have been great year-over-year that that would have looked good. So we kind of got hit. Do we think we'll get to 400? We do. Is the 300, no that’s gone. We spent it and its unfortunate but that's regularly up in 40 and that’s public company. There were some other things too that we didn't necessarily highlight that probably added up to another couple hundred kind of one-time quirky things when you go year-over-year comparison. So I mean when you look at it yes disappointing, but we got good explanations and as Kyle said we’re super excited with what we see ahead of us.

Are you ready to start to give some projections for the year, like you would mention the $100 million and $7.5 million, was that for this year or is that the run rate of or I wasn't quite sure how that was rewarded.

It’s a trailing 12 months. So we don't give guidance Larry, we’re not going to look forward to any guidance at least at this time, but when we give numbers like that it's on a trailing basis just to give people a sense of what's going on.

[Operator Instructions] And if there are no further questions do you have any closing comments to make.

No, that’s great. Well, thanks everyone for joining us. Really excited about what's going on here and glad to share with everyone our progress. Closing I’d like to say we’re very pleased with our progress and reiterate our continued focus on improvement. In the coming months hope to get the chance to meet and speak with many of you especially we have some upcoming investor conferences. We’ll be at LD Micro in first week of June out in Los Angeles so Chris will be there. And will have some others that come onto the calendar as the summer unfolds. So thanks everyone and with that I’d like to thank you for your time and interest in GSE.

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